1. Monetary And Fiscal Policy

2. Concept of Monetary policy
• Monetary policy refers to the use of instruments within
the control of the Central Bank to influence the level of
aggregate demand for goods and services or to
influence the trends in certain sectors of economy.
• Monetary policy operates through varying the cost and
availability of credit, these producing desired changes
in the assets pattern of credit institutions principally
commercial banks.
• These variations affect the demand for, and the supply
of credit in the economy, and the level and nature of
economic activities.

3. Monetary policy and Money Supply
• Money supply comprises currency with the public
and demand deposits. Both the monetary and
fiscal policies can affect money supply.
• The budgetary operations of the Government
considerable affect the money supply. If the
Government meets its budgetary deficits by
borrowing from the Reserve Bank, there will be
an increase in money supply.
• Another source of variation in money supply, over
which the RBI influence is restricted, is the
country’s international payments position.

4. • Demand deposits are a very important
determinant of money supply. In advanced
countries demand deposits form a major part
of money supply.
• Commercial banking instrument so control
operate by varying the cost and availability of
credit, and these produce desired changed in
the assets pattern of credit institutions,
principally commercial banks.

5. Instruments of Monetary Policy
1. General (Quantitative) methods
2. Selective (Qualitative) methods

6. General Credit Controls:
1. Bank Rate Policy: The Bank Rate, also known as
the Discount Rate, is the oldest instrument of
monetary policy. The traditional definition of
Bank Rate is that it is the rate at which the
central bank discounts or, more
accurately, rediscounts-eligible bills.
2. Open Market operations: Open market
operations refer broadly to the purchase and
sale by the Central Bank of a variety of assets
such as foreign exchange, gold, Government
securities and even company shares.

7. 3. Variable Reserve Ratios: Commercial banks in every country maintain,
either by the requirement of law by or custom, a certain percentage of
their deposits in the form of balances with the central bank.
• Cash Reserve Ratio: The RBI is empowered to vary the cash reserve
ratio between 3 per cent and 15 per cent of the total demand and time
liabilities.
In March 2001, the Reserve Bank of India cut the CRR by half a
percentage to 7.5 per cent and this was estimated to release over Rs.
4000 crore to the economy.
• SLR: The Banking Regulation Act has been amended, requiring all banks
to maintain a minimum amount of liquid assets which shall not be less
than a certain specified percentage of their demand and time liabilities
in India, exclusive of the cash balances maintained under Section 42 of
the Reserve Bank of India Act in the case of schedule banks, and
exclusive of the cash balances maintained under Section 18 of the
Banking Regulation Act of non scheduled banks.

8. Selective Credit Regulation:
Selective and qualitative credit control refers to regulation of credit for
specific purposes or branches of economic activity. Selective controls
relate to the distribution or direction of available credit supplies
The Banking Regulation Act confers on the RBI to give directions To
commercial banks
a) The purpose for which advances may or may not be made
b) The margin to be maintained in respect of secured advances.
c) The maximum amount of advances or other financial accommodation
which, having regard to the paid-up capital, reserves .
d) The maximum amount up to which having regard to the considerations
referred to in clause(c) guarantees may be given by a banking co. on
behalf of any one company, firm
1. Moral Suasion: In addition to the above mentioned methods of credit
control, both quantitative and qualitative, it may be noted that the use has
also been made in this country of moral suasion.

9. Fiscal Policy
• Fiscal policy is that part of Government policy which is
concerned with raising revenue through taxation and
other means and deciding on the level and pattern of
expenditure.
• The fiscal policy operates through the budget. The
Budget is an estimate of government expenditure and
revenue for the ensuing financial year, presented to
Parliament usually by the Finance Minister.
Occasionally, in times of financial crisis, interim
Budgets may be introduced later in the year to increase
taxation, expenditures, etc.

10. The Union Budget
• The Constitution of India provides that-
1. No tax can be levied or collected except by
authority of law.
2. No expenditure can be incurred for public funds
except in the manner provided in the
constitution.
3. The executive authorities must spend public
money only in the manner sectioned by
Parliament in the case of the Union and by the
State legislature in the case of a State

11. Cont…
• An estimate of all anticipate revenue and
expenditure of the Union Government for
ensuing financial year is laid before Parliament
on the last working day of February every
year. This known as the Annual Financial
Statement or the Budget

12. The Structure of Budget
• The Budget is divided vertically into revenue (receipts)
expenditure (disbursements). Horizontally, it is divided into
revenue account and capital account. The receipts are,
thus, broken up into Revenue Receipts and Capital
Receipts; and disbursements are broken up into Revenue
Expenditure and Capital Expenditure.
• The revenue expenditure includes all current expenditure
of the Government on administration, and the capital
expenditure includes all the capital transactions of the
Government.
• The revenue receipts include revenue from taxes, while
capital receipts include market loans, external aid, income
from repayments and other receipts, such as income from
public

13. Finances of the Union
• Examples of Sources of Revenue for the Union
1. Taxes on income
2. Duties and customs
3. Duties of excise on tobacco
4. Estate Duty in respect of property
5. Duty in respect of succession of property

14. • Examples of sources of Revenue for the State
1. Land revenue, including the assessment and
collection of revenue.
2. Taxes on agricultural income.
3. Duties in respect of succession to
agricultural lands.
4. Taxes on building and land

15. • Concurrent List:
1. Stamp duties other than duties or fees
collected by means of judicial stamps but
including rates of stamp duty.
2. Fees in respect of any of the matters in this
list but no including fees taken in any court.

16. Importance of the Budget
• The Budget should set the stage for the
achievement of economic and social goals.
• In India, today, about a half of the GDP is
channeled into the Government sector by the
Union, State and UT Budgets and disbursed by
the Union, State and UT Govt. under various
development and non development heads. These
indicate the development and distributive
importance and implications of the Budgetary
operations

17. • In India the Budget policy aha to serve the following
purposes:
1. Accelerate the pace of economic development by
mobilizing resource for the public sector and their
optimal allocation;
2. Effect improvement in production in the private
sector in accordance with the national priorities;
3. Effect Improvements I income distribution;
4. Promote exports and encourage import substitution
and
5. Achieve economic stabilization

18. Financial Market Structure
Credit
Market
Derivatives Money
market Market
Financial
Market
Structure
Debt Capital
market market
Foreign
exchange
market

19. Credit markets
• The credit market is the predominant source of
finance. As the Indian capital market is relatively
underdeveloped, firms or economic entities
depend largely on financial intermediaries for
their fund requirements.
• The major institutional surveyors of credit in
India are banks and non banking financial
institutions, i.e., development financial
institutions (DFI) and other financial institutions
(FI) and non banking financial companies(NBFC)

20. Banks
• An important development in the financial sector in the
recent years has been the diversification and growth of
para banking activities such as, leasing, hire purchase,
factoring, etc.
• Merchant Banking is an important area where subsidiaries
of banks have made their presence felt (stock market)
• The dealing in government securities is another area where
banks have been fairly active, Venture capital , housing
finance, credit card business.
• Regulations: There is a shared responsibility between the
Reserve Bank and SEBI in the regulation of para banking
activities of banks.

21. Financial Institutions
• A large variety of financial institutions has come
into existence over the years to perform a variety
of financial activities.
• All India development banks
(IDBI, IFCI, ICICI, SIDBI) occupy an important
position in the financial system as the main
source of medium and long term project finance
to industry.
• Besides, specialized financial institutions are also
operating in the areas of export import (EXIM
Bank), NABARD, UTI for investment in mutual
fund

22. Non Banking Financial Companies
(NBFC)
• NBFC are financial intermediaries engaged
primarily in the business of accepting deposits
and making loans and advances, investments,
leasing, hire purchase, etc. for example Nidhi’s
and chit funds

23. Housing Finance Companies
• The formal segment of housing finance includes
funding provided by the Central and State
Governments and funds from financial
institutions like GIC, LIC, commercial banks and
specialized housing finance institutions .
• The National Housing Bank Act, 1988, as a wholly
owned subsidiary of the Reserve Bank.
• NHB regulates HFCs, refinance their operations
and expands the spread of housing finance to
different income groups.

24. Foreign Exchange Market
• The foreign exchange market in India
comprises customers, authorized dealers and
the Reserve Bank

25. PART I. INTRODUCTION
A . The Currency Market:
where money
denominated in one
currency is bought and
sold with money
denominated in another
currency.

26. INTRODUCTION
B. International Trade and
Capital Transactions:
- facilitated with the ability
to transfer purchasing power
between countries

27. INTRODUCTION
C. Location
1. no specific
location
2. Most trades by phone,
telex, or through internet
(online trading)

28. PART II.
ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
I . PARTICIPANTS IN THE FOREIGN
EXCHANGE MARKET
A. Participants at 2 Levels
1. Wholesale Level (95%)
- major banks
2. Retail Level
- business
customers.

29. ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
B. Two Types of Currency
Markets
1. Spot Market:
- immediate transaction
- recorded by 2nd
business day

30. ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
2. Forward Market:
- transactions take place at a
specified future date

31. ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
C. Participants by Market
1. Spot Market
a. commercial banks
b. brokers
c. customers of commercial
and central banks

32. ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
2. Forward Market
a. arbitrageurs
b. traders
c. hedgers
d. speculators

33. ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
CLEARING SYSTEMS
A. Clearing House Interbank
Payments System
(CHIPS)
- used in U.S. for electronic
fund transfers.

34. ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
SIZE OF THE MARKET
A. Largest in the world
1995: $1.2 trillion daily

35. ORGANIZATION OF THE FOREIGN EXCHANGE
MARKET
B. Market Centers (1995):
London = $464 billion
daily
New York= $244 billion
daily
Tokyo = $161 billion
daily

36. PART III.
THE SPOT MARKET
I. SPOT QUOTATIONS
A. Sources
1. All major newspapers
2. Major currencies have
four different quotes:
a. spot price
b. 30-day
c. 90-day
d. 180-day

37. THE SPOT MARKET
E.Currency Arbitrage
1. If cross rates differ from
one financial center to
another, and profit
opportunities exist.

38. THE SPOT MARKET
2. Buy cheap in one int’l market,
sell at a higher price in
another
3. Role of Available Information

39. THE SPOT MARKET
F. Settlement Date Value Date:
1. Date monies are due
2. 2nd Working day after date of
original transaction.

40. PART III.
THE FORWARD MARKET
I. INTRODUCTION
A. Definition of a Forward
Contract
an agreement between a bank and a
customer to deliver a specified amount
of currency against another currency at
a specified future date and at a fixed
exchange rate.

41. THE FORWARD MARKET
2. Purpose of a Forward:
Hedging
the act of reducing exchange
rate risk.

42. THE FORWARD MARKET
C. Forward Contract Maturities
1. Contract Terms
a. 30-day
b. 90-day
c. 180-day
d. 360-day
2. Longer-term Contracts

43. MARKET

44. INTRODUCTION
The debt market is any market situation where trading d
instruments take place.
Examples of debt instruments include
mortgages, promissory notes, bonds, and Certificates of
Deposit
A debt market establishes a structured environment
where these types of debt can be traded with ease
between interested parties.

45. The debt market often goes by other names, based
on the types of debt instruments that are traded
In the event that the market deals mainly with the
trading of corporate bond issues, the debt market
may be known as a bond market.
If mortgages and notes are the main focus of the
trading, the debt market may be known as a credit
market
When fixed rates are connected with the debt
instruments, the market may be known as a fixed
income market.

46. CLASSIFIACTION OF INDIAN DEBT MARKET
Government Securities Market (G-Sec Market):
It consists of central and state government securities. It
means that, loans are being taken by the central and state
government. It is also the most dominant category in the
India debt market.
Bond Market:
It consists of Financial Institutions bonds, Corporate bonds
and Public Sector Units bonds. These bonds are issued to
meet financial requirements at a fixed cost and hence remove
uncertainty in financial costs.

47. DEBT INSTRUMENTS
Government Securities
Corporate Bonds
Certificate of Deposit
Commercial Papers

48. Government Securities
It is the Reserve Bank of India that issues Government
Securities or G-Secs on behalf of the Government of India.
These securities have a maturity period of 1 to 30 years. G-
Secs offer fixed interest rate, where interests are payable
semi-annually.
For shorter term, there are Treasury Bills or T-Bills, which are
issued by the RBI for 91 days, 182 days and 364 days

49. Corporate Bonds
These bonds come from PSUs and private corporations
and are offered for an extensive range of tenures up to 15
years.
Comparing to G-Secs, corporate bonds carry higher risks,
which depend upon the corporation, the industry where the
corporation is currently operating, the current market
conditions, and the rating of the corporation

50. Certificate of Deposit
Certificate of Deposits (CDs), which usually offer higher
returns than Bank term deposits, are issued in demat form
Banks can offer CDs which have maturity between 7 days
and
1 year.
CDs from financial institutions have maturity between 1
and 3 years
Commercial Papers
There are short term securities with maturity of 7 to 365 days.

51. Structured Debt
structured debt is some type of debt instrument that the lender
has created and adapted to fit the needs and circumstances of
the borrower
.Gilt Funds
The Reserve Bank also encouraged setting up of mutual funds
dealing exclusively in gilts, called gilt funds with a view to
encouraging schemes of mutual funds dedicated to Government
securities.

52. MONEY MARKET

53. 1! What is Money Market?
As per RBI definitions “ A market for short terms financial
assets that are close substitute for money, facilitates
the exchange of money in primary and secondary
market”.
• The money market is a mechanism that deals with the
lending and borrowing of short term funds (less than
one year).
• A segment of the financial market in which financial
instruments with high liquidity and very short
maturities are traded.

54. Continued…….
• It doesn’t actually deal in cash or money but
deals with substitute of cash like trade bills,
promissory notes & govt papers which can
converted into cash without any loss at low
transaction cost.
• It includes all individual, institution and
intermediaries.

55. Structure of Indian Money Market?
I :- ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (discount and finance house of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

56. Continued…..
II. UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis
III. CO-OPERATIVE SECTOR
1. State cooperative
i. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
central land development banks
Primary land development banks

57. Functions of Money Market
• A well developed money market is the basis for an
effective monetary policy.
• A money market functions like a dam-canal-irrigation
system. It collects and augments the resources and
channelizes it to the various needed areas.
1. By providing various kinds of credit instruments
suitable and attractive for different sections, a money
market augments the supply of funds.
2. Efficient market helps to minimize the gluts and
stringencies in the money market due to the seasonal
variations in the flow of and demand for funds.

58. Continued
3. A money market, helps to avoid wide seasonal
fluctuations in the interest rates.
4. A well organized money market, through quick transfer
of funds from one place to another.
5. It enhances the amount of liquidity available to the
entire country.
6. A money market, by providing profitable investment
opportunities for short-term surplus funds, helps to
enhance the profit of financial institutions and
individuals.

59. The Indian Money Market
• The money market in India comprise two
sectors which may broadly be termed as the
Organized and Unorganized markets, with
substantially higher rates of interest in the
unorganized sector.
• The organised market comprises in the first
place the Reserve Bank which is the key
constituent of the money market.
• Then come the commercial banks. They include
the public sector banks and other banks
including Indian and foreign.

60. • In the past, quasi government bodies and
large size joint stock companies also used to
participate in the operations of the money
market as lenders, the money lent by them
being usually termed ‘house money’.
• Then there are the financial intermediaries
such as call loan brokers and stock brokers.

61. Continued
• The co-operative credit institutions occupy a
somewhat intermediate position between the
organized and unorganized sectors of the money
market.
• A well developed money market will have close
links with the leading money markets of the
world and will be sensitive to the developments
in these foreign markets.

62. Money market Instruments and
Constituents
Money Market consists of a number of sub-markets
which collectively constitute the money market.
They are,
Commercial bills market or discount market:
Commercial Bills or Bills of exchange are
important instruments used to facilitate credit
sales. Commercial bills can be discounted with
banks and the banks, when they are in need of
funds, may rediscount them in the money
market.

63. Call Money Market
• Call and notice money are money dealt for one to 14
days.
• The period of term money ranges from 14 days to 90
days.
• This is sometimes a very volatile market and the
interest rate is determined by the market forces
• This market is of vital importance to banks and
financial institutions because of the avenue it
provides for investing surplus funds and meeting the
deficits.
• The inter-bank lending is the major component of
this market.

64. Treasury Bills (T-Bills)
• Treasury bills are promissory notes issued by the
Central Government to raise short term funds to
bridge short term mismatches between receipts and
expenditures.
• The RBI which issues the TBs on behalf of the
Government does not purchase them before
maturity but investors can sell them in the secondary
market.

65. Certificate of deposit (CD)
• A CD is a time deposit with a bank.
• Like most time deposit, funds can not
withdrawn before maturity without paying a
penalty.
• The main advantage of CD is their safety.
• Anyone can earn more than a saving account
interest.

66. Commercial paper (CP)
• Commercial Papers are unsecured promissory notes
of short term maturity of highly rated companies,
issued to meet working capital requirements. The CP
is subject to credit rating by any of the recognized
credit rating agencies in India.

67. Repurchase agreement (Repos)
• Repo is a money market instrument, which enables
collateralized short term borrowing and lending
through sale/purchase operations in debt
instruments.
• Under a repo transaction, a holder of securities sells
them to an investor with an agreement to
repurchase at a pre-determined date and rate.

68. Capital Market
 Capital Market is generally understood as the
market for long-term funds
 Capital Marketing is defined as “the process of
increasing the major part of financial capital
required for starting a business through issue of
shares to public”.
 The issue may be Shares, Debentures , Bonds,
etc.
 Capital market is a market for long term debts
and equity shares

69. Nature and Constituents
• Players of Capital Market
1. Government
2. Stock Exchange
3. Commercial banks,
4. Savings banks
5. Development bank
6. Insurance companies
7. Investment trust

70. Cont…
• In the capital market, the supply of funds
comes from the individual and corporate
savings, institutional investors and surplus of
governments. The demand for capital comes
mostly from agriculture, industry, trade and
the government.

71. Importance of Capital Market
Pooling the capital resources and Developing
enterprises investors
Solve the problem of paucity of funds
Mobilize the small and scattered savings
Augment the availability of investible funds
Growth of joint stock business
Provide a number of profitable investment
opportunities for a small savers

72. Capital Market In India
• Indian capital market witnessed some significant
changes during the eighties, both the primary
and the secondary segments continued to suffer
from some serious deficiencies.
• Many unhealthy practices prevailed in the
primary market to attract the retail investors.
• Another disturbing feature was the high cost of
new issues
• The general functioning of stock exchanges was
not satisfactory
• .

73. • Insider trading was rampant and was one of
the major causes of excessive speculative
activity
• The stock exchanges followed inefficient and
outdated trading systems.
• Post trade settlement procedures also
suffered from some serious drawbacks, such
as, high share of bad deliveries, delayed
settlements

74. Nature of the Indian Capital Market
• Indian capital market also consists of an
organized sector and an unorganized sector.
• In the organized market the demand for capital
comes mostly from corporate enterprises and
govt. and semi govt. institutions and the supply
comes from household savings, institutional
investors like banks investment trusts, insurance
companies, finance corporations, govt. and
international financing agencies.

75. • The unorganized market consists mostly of the
indigenous bankers and moneylenders on the
supply side.
• A large part of the demand for funds in the
unorganized market is for consumption
purposes.

76. Capital Market Structure
• New New New Issues
Marketable securities Non-Marketable securities
Bank Deposits with companies Loans
Govt. sec corporate sec P.S.U.Bonds
and Advances of Banks Post office
UTI Mutual Funds
certificates and Deposits
New Issues Market Stock Market: New Issue Market
Players-Original Intermediaries Players – For Issues
Promoters and •Merchant Bankers
Directors Associates •Collecting Bankers
and Friends •Brokers •Brokers
collaborators •Jobbers •Underwriters
Employees FIs and •Dealers •Advertising Agencies
Banks NRI’s Public •Arbitrageurs

77. Development of the Market
1. Legislative measures: Laws like the Companies Act,
the Securities Contracts Act and the Capital Issues
Act.
2. Establishment of development banks and expansion
of the public sector: Starting with the establishment
of the IFCI, a number of development banks have
been established. Life Insurance was nationalized in
1956 and the General Insurance in 1972. With 27
Nationalized banks over 90 % of the commercial
banking business came to be concentrated in the
government sector

78. 3 Growth of underwriting business:
4. Public confidence: Impressive performance of
certain large companies encouraged public
investment in industrial securities.
5. Introduction of Book Building

79. 5. Increasing awareness of investment
opportunities: The improvement in education
and communication has created more public
awareness about the investment
opportunities in the business sector.
6. Capital Market Reforms: A number of
measures have been taken to check abuses
and to promote healthy development of the
capital market.

80. SEBI
• Set up originally in 1988 by Govt. of India
Acquired statutory form in 1992 under SEBI
Act 1992
• Chairman is Sh. U.K. Sinha Headquartered in
Mumbai

81. Objectives
• Established in 1992 with three main objectives
To protect the interest of investors in
securities
• To promote the development of securities
market
• Make rules and regulations for the securities
market
• Focus being the greater investor protection,
SEBI has become a vigilant watchdog

82. Functions & Powers
• Regulating the business in stock exchanges and
any other securities market.
• Registering and regulating the working of stock
brokers, agents, bankers to an issue, merchant
bankers, underwriters, etc.
• Registering and regulating the working of
collective investment schemes, including mutual
funds.
• Prohibiting fraudulent and unfair trade practices
in securities market.

83. • Promoting investor education and training of
intermediaries in securities market.
• Prohibiting insider trading in securities.
• Regulating substantial acquisition of shares
and take-over of companies.
• Conducting research for the above purpose.