Financial institutions, financial market and financial instruments are considered main components that are closely linked with each other, because financial institutions deals in financial instruments in the financial market. Financial transactions takes place in financial markets. Each and every business unit must operate within the financial system. The financial system consists of a number of organization and institutions and markets serving the needs of consumers, firms and governments. If a firm invests temporarily idle funds in marketable securities, then it has to approach the financial markets. Most firms use financial markets to help finance their investments in assets. Financial markets are at the core of the transmission mechanism of monetary policy. In India, financial markets have been developed with a specific emphasis on increasing allocation efficiency of resources and promoting financial stability. A Financial system operates through financial markets and institutions. Financial markets deal in financial assets and instruments of various kinds such as currency, deposits, cheques, bills, and bonds, etc. Financial markets are very much like markets for goods and services. As such, they have their own demand, supply, quantities, prices etc. Financial markets are the centers or arrangement that provide facilities for buying and selling of financial claims and services. The corporations, financial institutions, individuals and governments trade in financial products on the markets either directly or through brokers and dealers on organized exchanges or off-exchanges. The participants on the demand and supply sides of these markets are financial institutions, agents, brokers, dealers, borrowers, lenders, savers, and others who are inter-linked by the laws contracts covenants and communication networks.
[...] Capital Market from pre-period 1991 Prior to the onset of financial sector reforms in 1991, the capital market structure in India was subject to several controls and opaque procedures. The trading and settlement system was outdated and not in tune with international practices. Raising of capital from the market was regulated by the capital issues act which was administered by the Controller of Capital Issues [CCIs] in the ministry of finance, Government of India. The scheme of controls under the act required all the companies to obtain prior consent for issues of capital to the public. [...]
[...] Meaning of money market Money market is the important segment of the financial system as it provides the fulcrum for equilibrating short-term demand for and supply of funds, thereby facilitating the conduct of monetary policy. It is a market for short-term funds with a maturity of up to one year and includes financial instruments that are close substitutes for money. The main instruments comprising the money market are: Call / Notice money market Certificates of deposit Commercial paper Commercial bill Definition of money market The money market includes the entire machinery for channeling a short-term funds. [...]
[...] Some of the motives behind the introduction of certificate of deposits in different countries were to mop up excess liquidity in the monetary system, to introduce financial reforms, to restore intermediation function of banks and to innovate financially, the major motive for introduction of certificate of deposits by banks has been to meet competition and maintain the share of financial markets by means of certificate of deposits which have some advantages over the time deposit. The banks introduced certificate of deposits as a competitive tool against other financial intermediaries as well as the process of securitization. [...]
[...] Financial markets are usually determined by the supply and demand of funds. Financial markets are said to be perfect when A large no of savers and investors operate in the markets, The participants are rational All players in the market are well informed and the information is freely available to all them There are no taxes There are no transactions costs The financial assests are infinitely divisible. The financial markets can perform proximate functions such as Enhancing liquidity of financial assets, Transformation of financial claims to suit the needs of the participants Enabling the business concerns to exercise their time preference Diversification, distribution and reduction of risk Better mode of operation of the payment mechanism Financial markets are characterized by many imperfections, restrictive practices, existence of transaction costs, lack of information, limited no of operators, direct intervention by the authorities and so on. [...]
[...] Prior to financial sector reforms initiated in early 1990s, money market in India was characterized by poor liquidity, the paucity of instruments and limited number of participants. The major features of the Indian money market were the following. Restricted market with a narrow base and limited number of participants- banks and two all India financial institutions. The entry into the market was tightly regulated. Moreover, the market was lopsided with a few large lenders and a large number of borrowers. [...]
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