Role of Bank in Money Market &

Capital Market
 Financial Market
Financial market is a market where all the
financial instruments are traded.
It can be broadly classified into 2 segments:
1. Money Market
2. Capital Market
 Money Market
A segment of the financial market in which
financial instruments with high liquidity and very
short maturities are traded. The money market is
used by participants as a means for borrowing
and lending in the short term, from several days
to just under a year. Money market securities
consist of negotiable certificates of deposit
(CDs), bankers acceptances, Treasury bills,
commercial paper, municipal notes and
repurchase agreements (repos).
 CRR
Cash Reserve Ratio (CRR) is the amount of
funds that all Scheduled Commercial Banks
(SCB) excluding Regional Rural Banks (RRB) are
required to maintain without any floor or
ceiling rate with RBI with reference to their
total net Demand and Time Liabilities (DTL) to
ensure the liquidity and solvency of Banks
(Section 42 (1) of RBI Act 1934). The current
CRR is 4.00% and at present no incremental
CRR is required to be maintained by the
banks.
 SLR
Statutory liquidity ratio refers to the amount
that the commercial banks require to maintain
in the form of gold or govt. approved
securities before providing credit to the
customers.
 Rates
REPO Rate: 7.25%
Reverse REPO: 6.25%
CRR: 4%
SLR: 22%

Note: Rate may differ according to fresh

monetary policy.
 Role of RBI in Money Market
RBI operates in money market through various
methods:
1. Liquidity adjustment facility (LAF)
2. Treasury Bills
3. Discount & Finance House of India
4. Commercial Bills of Exchange
5. Certificate of Deposit
6. Commercial Paper
 Liquidity adjustment facility (LAF)
Present RBI manages liquidity in the economy
through the REPO & Reverse REPO auctions
under LAF.
It absorbs liquidity through repos and releases
fund through reverse repo.
 Treasury Bills
A Treasury Bill is an instrument for short-term
borrowing by the GOI. It is issued by RBI on
behalf of GOI in the form of a promissory note.
The necessity for issuing TBs arises because of
the periodic nature of receipts of Government
while the Government expenditure is on a
continuing basis.
Thus, to bridge this mis-match between the
timings of Government receipts & expenditure,
Government borrows money on short-term basis
by issuing TBs.
Discount & Finance House of India
DFHI was set up by RBI jointly with public
sector banks and All India Financial
Institutions. The main objective of establishing
DFHI was to facilitate the smoothening of the
short-term liquidity imbalances by developing
an active money market and integrating the
various segments of the money market.
 Activities of DFHI includes:
1. Dealing in Treasury Bill
2. Re-discounting short-term commercial bills
3. Participating in the Inter-Bank Call Money,
notice Money and term-deposit market
4. Dealing in Commercial Papers, Certificates of
Deposits and Government Securities
 Commercial Bills of Exchange
Commercial Bills of Exchange arise out of
genuine trade transactions and are drawn by
the seller of the goods on the buyers (i.e.,
Debtors), where goods are sold on credit.
CBoE is a negotiable instrument i.e., it may be
negotiated (or endorsed / transferred) any
number of times till its maturity.
 Certificate of Deposits
A certificate of Deposit is a receipt for a
deposit of money with a bank or a financial
institution.
It differs from a FDs in two aspects:
1. It is issued for big amount.
2. It is freely negotiable.
 Commercial Paper
Commercial Paper is a short-term usance
promissory note with a fixed maturity issued
by creditworthy and highly rated corporations.
It is negotiable by endorsement & delivery.
 Capital Market
A market in which individuals and institutions
trade financial securities.
Organizations/institutions in the public and
private sectors also often sell securities on the
capital markets in order to raise funds. Thus,
this type of market is composed of both the
primary and secondary markets.
 Role of Bank
Acting as Investment Banker
Acting as Custodian
Acting as Underwriter
Trading settlement in T+2 Days
Reducing Risk
Acting as merchant banker
Risk management
Research Advisory