17.1 Money Market & Capital Market Instruments

17.1 Money Market & Capital Market Instruments

India's financial system comprises two interconnected institutional pillars: the Money Market and the Capital Market. Understanding the architectural division, statutory regulators, tenor thresholds, and characteristic debt and equity instruments of both markets is essential for scoring in the General/Financial Awareness section of the SBI Clerk (Junior Associate) examination.

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Conceptual Distinction: Money Market vs. Capital Market

The fundamental dividing line between money and capital markets rests on the maturity horizon of instruments traded, the primary regulatory authority, and the economic purpose served.

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Money Market Instruments

The Indian money market provides wholesale mechanisms for banks, financial institutions, and corporate treasuries to deploy short-term cash surpluses or bridge temporary liquidity deficits.

1. Inter-Bank Call, Notice, and Term Money Markets

The inter-bank money market enables scheduled commercial banks, regional rural banks, and cooperative banks to borrow and lend unsecured funds to maintain daily Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) balances:

• Call Money: Funds borrowed or lent for exactly one day (overnight). Transactions executed on Friday or the eve of a holiday mature on the next working day.
• Notice Money: Funds borrowed or lent for periods ranging from 2 days to 14 days.
• Term Money: Funds borrowed or lent for fixed tenors ranging from 15 days to 1 year.
• Prudential Borrowing Limits: Commercial banks face prudential ceilings on average daily borrowing in the call/notice market (typically capped at 100% of their capital funds on a fortnight-average basis) to contain systemic contagion risk.

2. Treasury Bills (T-Bills)

Treasury Bills are sovereign short-term debt instruments issued by the Reserve Bank of India on behalf of the Central Government (Government of India) to fund temporary fiscal gaps.

• Zero-Coupon Nature: T-Bills pay no periodic coupon interest. They are issued at a discount to face value and redeemed at par (nominal face value) on maturity. The yield to maturity represents the difference between the discounted issue price and face value.
• Standardized Tenors & Auction Schedule: 91-day, 182-day and 364-day T-Bills are all auctioned weekly, usually on Wednesdays, according to the quarterly calendar the RBI publishes on behalf of the Government.
• Minimum Denomination: Issued in minimum denominations of Rs. 25,000 and integral multiples of Rs. 25,000 thereafter.

[!WARNING] Critical Exam Trap: State Governments in India CANNOT issue Treasury Bills! Only the Central Government (GoI) issues T-Bills. When State Governments require market borrowings, they issue long-term dated bonds called State Development Loans (SDLs) in the capital market, or access short-term funds through the RBI's Ways and Means Advances (WMA) facility.

3. Cash Management Bills (CMBs)

Announced by the Government of India in consultation with the RBI in August 2009 and first issued in May 2010, Cash Management Bills are ultra-short-term, non-standard money market instruments:

• Tenor: Non-standard maturities strictly less than 91 days (e.g., 28 days, 42 days, 60 days).
• Function: Formulated to meet temporary, unexpected mismatches in the cash flow of the Government of India.
• Operational Features: Issued at a discount and redeemed at par, carrying identical generic characteristics to Treasury Bills, traded on the Negotiated Dealing System-Order Matching (NDS-OM) platform.

4. Commercial Paper (CP)

Commercial Paper was introduced in India in January 1990 based on the recommendations of the Vaghul Working Group on Money Market:

• Legal Nature: An unsecured, negotiable promissory note issued by highly credit-rated corporate borrowers, primary dealers (PDs), and All-India Financial Institutions (AIFIs) to diversify short-term debt sources.
• Eligibility Norms: Under the RBI's 2024 Master Direction on Commercial Paper and short-term Non-Convertible Debentures, eligible issuers (such as companies, NBFCs and All-India Financial Institutions) must obtain a credit rating of at least A3 from a credit rating agency and satisfy the Direction's other eligibility conditions.
• Minimum Denomination: Issued in minimum denominations of Rs. 5,00,000 (Rs. 5 lakh) and in integral multiples of Rs. 5 lakh thereafter.
• Maturity Period: Minimum maturity of 7 days up to a maximum maturity of 1 year (365 days) from the date of issue.

5. Certificates of Deposit (CD)

Introduced in 1989 following the Vaghul Committee recommendations, Certificates of Deposit represent securitized, negotiable time deposits:

• Issuing Entities: Scheduled Commercial Banks (excluding Regional Rural Banks and Payments Banks) and select All-India Financial Institutions (such as NABARD, SIDBI, EXIM Bank, NHB).
• Minimum Denomination: Issued in minimum denominations of Rs. 1,00,000 (Rs. 1 lakh) and multiples of Rs. 1 lakh thereafter.
• Maturity Horizon:
  • Issued by Commercial Banks: Minimum 7 days up to a maximum of 1 year.
  • Issued by Financial Institutions: Minimum 1 year up to a maximum of 3 years.
• Tradability & Transferability: Fully transferable by endorsement and delivery, issued in electronic dematerialized form through depositories (NSDL/CDSL).

6. Tri-Party Repo (TREPS)

In November 2018, the RBI replaced the legacy Collateralized Borrowing and Lending Obligation (CBLO) with Tri-party Repo (TREPS):

• Mechanism: A repo contract where a licensed third entity (the Tri-party Agent—specifically the Clearing Corporation of India Limited, CCIL) acts as an intermediary between borrowing and lending institutions without counterparty credit risk.
• Collateral: Backed by sovereign government securities deposited in a central pool with CCIL.
• Market Significance: Serves as the largest segment of domestic collateralized money market liquidity in India, allowing non-bank financial participants (mutual funds, insurance companies) to lend excess funds to banks and primary dealers.

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Master Summary: Money Market Instruments

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Capital Market Architecture & Instruments

The capital market facilitates the mobilization of non-inflationary, long-term capital for industry, services, and the sovereign state. It is bifurcated into the Primary Market (new issue market) and the Secondary Market (trading market).

Primary Market (New Issue Market)

The primary market is the arena where entities issue brand-new securities directly to investors to raise long-term equity or debt capital:

• Initial Public Offering (IPO): An unlisted company issues shares to the public for the first time, transforming into a publicly traded corporation listed on stock exchanges.
• Follow-on Public Offering (FPO): An already-listed public company issues additional fresh equity shares to the market to fund balance sheet expansion or debt retirement.
• Rights Issue: An offer extended strictly to existing equity shareholders to purchase additional new shares in proportion to their existing holdings, typically offered at a discount to current secondary market price.
• Private Placement: Securities offered to a targeted group of select institutional investors (up to a statutory maximum of 200 persons under Section 42 of the Companies Act, 2013) rather than the general public. Qualified Institutional Placements (QIPs) are standard private placements to mutual funds, insurers, and pension funds.
• Offer for Sale (OFS): An exchange-based mechanism where existing large promoters or pre-IPO venture investors sell down their holding directly to public buyers without the company issuing new equity.

Secondary Market (Stock Exchanges)

The secondary market provides continuous liquidity, price discovery, and exit options for previously issued securities. In India, secondary trading is anchored by two premier national exchanges:

• Bombay Stock Exchange (BSE): Founded in 1875 by Premchand Roychand as the Native Share & Stock Brokers' Association, the BSE is the oldest stock exchange in Asia. Its premier benchmark index is the BSE SENSEX (Sensitivity Index), comprising 30 large-cap, liquid stocks across key industrial sectors (Base Year: 1978–79 = 100).
• National Stock Exchange (NSE): Incorporated in 1992 on the recommendations of the M.J. Pherwani Committee and operationalized in 1994 as an advanced, screen-based electronic trading platform. Its benchmark index is the NIFTY 50, comprising 50 leading blue-chip companies (Base Year: 1995 = 1000).
• Settlement Cycle: In January 2023, Indian equities fully transitioned to a T+1 rolling settlement cycle (settling 24 hours post trade execution), making India one of the fastest settlement jurisdictions globally, with phased trials of T+0 rolling settlement launched in 2024.

Long-Term Capital Market Instruments

1. Equity Shares (Common Stock): Represent fractional ownership in a joint-stock enterprise, conveying voting rights and claims to residual earnings (dividends) without capital protection.
2. Preference Shares: Hybrid instruments bearing a fixed dividend payout that must be satisfied before common equity dividends, possessing preferential claim during corporate liquidation, but generally carrying no voting rights.
3. Debentures & Corporate Bonds: Long-term debt instruments. Debentures can be convertible (convertible into equity after a designated tenure) or non-convertible debentures (NCDs), secured by corporate assets or unsecured.
4. Government Securities (G-Secs / Dated Securities): Sovereign debt issued by the Central Government with maturities that run from a few years up to 50 years (for example, the 7.46% GS 2073), generally paying semi-annual coupons. Managed by RBI through its electronic E-Kuber platform.
5. Sovereign Gold Bonds (SGBs): Government securities denominated in grams of gold issued by the RBI on behalf of the Government of India. Feature an 8-year tenor (with exit options after 5 years), paying a fixed annual interest rate of 2.50%, with capital gains on redemption fully exempt from income tax. No fresh tranche has been issued since February 2024; existing bonds continue to run to maturity.
6. Sovereign Green Bonds (SGrBs): Targeted sovereign instruments whose proceeds are earmarked exclusively for public sector green projects that reduce carbon intensity.

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Statutory Regulatory Mandate of SEBI

The Securities and Exchange Board of India (SEBI) oversees capital markets to protect public wealth and ensure structural transparency:

• Genesis: Established on April 12, 1988, as an interim non-statutory body, and subsequently granted comprehensive autonomous statutory authority under the Securities and Exchange Board of India Act, 1992 on January 30, 1992.
• Headquarters: Mumbai, Maharashtra.
• Core Statutory Objectives:
  1. Protecting the interests of investors in securities.
  2. Promoting the orderly development of the securities market.
  3. Regulating business operations in stock exchanges and financial intermediaries (stockbrokers, underwriters, depositories, mutual funds, merchant bankers, credit rating agencies).
• Key Regulatory Safeguards: SEBI enforces strict regulations against market abuse, including the SEBI (Prohibition of Insider Trading) Regulations, SEBI (Issue of Capital and Disclosure Requirements - ICDR) Regulations, and SEBI (Listing Obligations and Disclosure Requirements - LODR) Regulations.