Get AHSEC Class 12 Finance Chapter: 7 INDIAN MONEY MARKET Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: 7 INDIAN MONEY MARKET Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
Chapter: 7 INDIAN MONEY MARKET
INDIAN MONEY MARKET
1. Discuss the Structure of the Indian Money Market. [AHSEC 2024]
Ans: Structure of the Indian Money Market The Indian Money Market is divided into two parts: the organized sector and the unorganized sector.
A. Organized Sector:
1. Reserve Bank of India (RBI): The RBI is like the head of the Indian Money Market. It was started in 1935. It controls and leads the market.
2. Scheduled Banks: Scheduled banks are those listed in the 2nd Schedule of the Reserve Bank of India Act, 1934. They need to have a paid-up capital and reserves of at least Rs. 5 lakhs. Their operations must not harm their depositors. They are also required to keep a certain portion of their money as reserves with the RBI.
Scheduled banks are classified as:
a. Cooperative Banks: These are banks run by groups of people to help each other financially. It includes both State Cooperative Banks and Urban Cooperative Banks.
b. Commercial Banks: These banks are very important in the money market. They provide money to the market. (i) Scheduled Public Sector Banks – State Bank of India, Bank of Baroda, Bank of India, Union Bank of India, UCO Bank, Punjab National Bank, Punjab & Sind Bank, Indian Overseas Bank, Indian Bank, Canara
Bank and Bank of Maharashtra.
(1) Scheduled Private Sector Banks- Axis Bank Ltd., Bandhan Bank Ltd., Federal Bank Ltd., HDFC Bank Ltd., ICICI Bank Ltd.. YES Bank Ltd., IDBI Bank Ltd., Kotak Mahindra Bank Ltd., IDFC FIRST Bank Ltd, IndusInd Bank Ltd., Karnataka Bank Ltd., Jammu & Kashmir Bank Ltd., etc.
(iii) Regional Rural Banks: These banks serve specific regions and are designed to support rural development. Some examples include Assam Gramin Vikash Bank, Arunachal Pradesh Rural Bank, Manipur Rural Bank, Meghalaya Rural Bank, and many others.
(iv) Foreign Scheduled Banks: These are banks based in foreign countries that operate in India. Some examples are HSBC Ltd., Barclays Bank Pic, Standard Chartered Bank, and Deutsche Bank.
(v) Scheduled Small Finance Banks: These are smaller banks that focus on providing financial services to specific areas. Examples include North East Small Finance Bank Ltd., Ujjivan Small Finance Bank Ltd., and Utkarsh Small Finance Bank Ltd.
vi) Scheduled Payments Banks: These banks offer limited banking services, especially focusing on digital and electronic payments. Examples are India Post Payments Bank Ltd., Fino Payments Bank Ltd., and Paytm Payments Bank Ltd. their
3. Non-Scheduled Banks: These banks are not included in the 2nd Schedule of the RBI Act, 1934, and the number is decreasing nowadays.
4. Development Banks and Other Financial Institutions: Development banks and financial institutions like the Industrial Finance Corporation of India, State Financial Corporations, Small Industries Development Corporation, National Bank for Agriculture and Rural Development, Life Insurance Corporation of India, and General Insurance Corporation of India also play a role in the Indian Money Market, often indirectly through banks.
5. Discount and Finance House of India (DFHI): The Discount and Finance House of India (DFHI) was set up on March 9, 1988, as a special institution for the money market. It was created to achieve two main goals: (i) providing liquidity to money market instruments and
(ii) developing a secondary market.
B. Unorganised Sector: The unorganized sector of the Indian Money Market includes indigenous banks and money lenders. This sector is not structured/organized because it operates without direct control and coordination of the RBI.
i. Indigenous Bankers: Indigenous bankers are part of India’s ancient banking system. An indigenous bank or banker is an individual or private company that takes deposits, deals with documents called “HUNDIES,” or lends money. According to the Indian Central Banking Enquiry Committee, these bankers are people or firms that accept deposits and are involved in lending money using “HUNDIES.”
ii. Money Lenders: Money lenders primarily lend money from their own funds. They usually don’t take deposits. Their business is mainly in rural areas. Money lenders work with cash and lend money for various purposes, including personal spending. So, the Indian Money Market has organized and unorganized parts, each with its own way of working.
2. What are the defects of the Indian Money Market? [AHSEC 2024]
Ans:- The Indian Money Market suffers from several shortcomings that hinder its optimal functioning and effectiveness. The main defects in the Indian Money Market are as follows:
a. Division between Organized and Unorganized Sectors: The Indian Money Market is split into two sectors, namely the organized sector and the unorganized sector. This division poses a significant challenge as there is limited cooperation and coordination between these sectors. This lack of synchronization makes it difficult for the Reserve Bank of India (RBI) to exert consistent control over both sectors.
b. Presence of Unorganized Sector: One of the major drawbacks is the existence of the unorganized sector, primarily composed of indigenous bankers and money lenders. This sector holds a prominent position in lending, particularly in rural regions. Its activities are not directly regulated by the RBI, leading to potential exploitation and debt-related issues for borrowers.
c. Unhealthy Competition: Unhealthy competition exists not only between the organized and unorganized sectors but also within each sector. For instance, commercial banks, including prominent ones like the State Bank of India, compete among themselves. Additionally, there is competition between Indian commercial banks and foreign banks.
d. Inadequate Banking Facilities: The availability of banking facilities in India is not commensurate with the country’s size and population. This inadequacy hampers the Indian Money Market’s ability to meet the diverse financial needs of the economy.
e. Shortage of Funds: Several factors contribute to a shortage of capital funds in the Indian Money Market. These factors include low saving capacity among the population, inadequate banking services in rural areas, and a lack of well-developed banking habits among people.
f. Disparity in Interest Rates: A notable defect is the disparity in interest rates across different segments of the Indian Money Market. This includes differences in interest rates offered by cooperative banks, lending rates of financial institutions, and government borrowing rates. Such discrepancies disrupt the smooth functioning of the money market.
g. Seasonal Fluctuations of Funds: The Indian Money Market experiences significant fluctuations in the demand for funds due to seasonal variations. For instance, there is heightened demand for credit during the agricultural harvest season (November to January), while the demand decreases from July to October.
h. Absence of a Well-Developed Bill Market: The Indian Money Market faces a deficiency in the form of an underdeveloped bill market. Despite efforts by the RBI, the bill market in India has not reached the desired level of development. i. Limited Availability of Instruments: The range of money market instruments, such as bills and treasury bills, is inadequate compared to the diverse requirements for short-term funds in the Indian Money Market. If the above defects are properly addressed/solved, the Indian Money Market could become more efficient,
inclusive and better aligned with the country’s financial needs and goals.
3. What are the instruments traded in the Indian Money Market?
Ans:- Various financial instruments are traded in the Indian Money Market. Some of them are: 1. Treasury Bills 2. Commercial Bills 3. Commercial Papers 4. Certificate of Deposits 5. Call Money
Types of Financial Instruments in the Money Market 2024
1. Treasury Bills: Treasury bills are essential tools in the money market. They are short-term obligations issued by the Reserve Bank of India on behalf of the government. These bills are like promissory notes, representing the government’s short-term borrowings. They are issued when the government needs temporary funds, usually for less than a year. There are three types of treasury bills based on their duration: 91 days, 182 days, and 364 days. These bills are traded in the market and serve as vital instruments for managing short-term liquidity.
Types of Treasury Bills
a. Ordinary Treasury Bills: Ordinary treasury bills are issued to the general public and other financial institutions. They serve the purpose of fulfilling the Central Government’s short-term financial needs. These treasury bills are easily tradable in the market, allowing them to be bought and sold at any time. They also have a secondary market where they can be traded.
b. Ad Hocs’ Treasury Bills: ‘Ad hocs’ treasury bills are exclusively issued in favor of the RBI. The RBI purchases these treasury bills and is granted the authority to release currency notes against them. These bills enable the Central Government to raise funds through the RBI. The ‘ad hocs’ bills serve as a financial mechanism between the government and the central bank, facilitating short-term funding when needed.
2. Commercial Bills: Commercial bills emerge from real trade transactions where goods are sold on credit. They are short-term and negotiable instruments that facilitate credit transactions. A seller drafts a bill on the buyer and the buyer agrees to pay on a specified date. These bills are known as “bills of exchange” and are governed by the Negotiable Instruments Act, of 1881. When banks accept these bills, they become “commercial bills.” Banks can even re-discount them when necessary.
Commercial bills are of various types. They are:
i) Demand bills and Usance bills
ii) Clean bills and Documentary bills
ii) Inland bills and Foreign bills
iii) Export bills and Import bills
iv) Accommodation bills and Supply bills
v) Indigenous bills (Hundi)
3. Commercial Papers: Commercial papers are issued by well-established corporations to raise short-term funds for their working capital needs. They are unsecured promissory notes with fixed maturities. These papers are issued at a discount to their face value and are negotiable through endorsements and delivery. They are issued in bearer form and can be bought back by the issuer if needed. Corporations, primary dealers and financial institutions approved by the RBI can issue commercial papers.
4. Certificate of Deposits: Certificates of deposits (CDs) are another form of short-term time deposits. They are receipts for such deposits issued by banks. CDs are issued at a discount to their face value and serve as a way to raise significant sums of money for banks. They are unsecured, negotiable, transferable, and subject to certain regulations like SLR and CRR requirements. Only scheduled commercial banks and selected all-India financial institutions permitted by the RBI can issue CDs.
5. Call Money/Notice Money: The call money market is a crucial part of the money market, providing very short-term funds. In this market, funds are lent or borrowed for a brief period, often just a day. When funds are borrowed for one day, it’s called “call money,” and if it’s borrowed for more than a day up to 14 days, it’s called “notice money.” This market is highly liquid but also risky and volatile. Various banks, including foreign banks, cooperative banks, and the Discount and Finance House of India, can participate in this market.
These financial instruments serve different purposes within the money market, catering to short-term borrowing and lending needs while contributing to the overall functioning of the financial system.
4. SHORT NOTES: Write short notes on
a. Commercial Papers:
b. Certificate of Deposits:
c. Call
Money/Notice Money Commercial Papers (CP): Commercial papers are short-term money market instruments issued by established corporations to raise funds for their working capital needs. They are unsecured promissory notes issued at a discount to their face value. CPs have a fixed maturity period and are negotiable through endorsements and delivery. They are issued in bearer form and can be bought back by the issuing companies if necessary. Besides corporations, primary dealers and all-India financial institutions can also issue CPs. These instruments are accessible to individuals, companies, banks, registered Indian corporate bodies, unincorporated bodies, and even Foreign Institutional Investors (Fils). CPs are either issued as unsecured promissory notes or in dematerialized form at a discount.
Certificate of Deposits (CDs): Certificates of Deposits represent another form of short-term time deposit. They are issued at a discount and are intended for raising substantial funds, CDs are unsecured instruments that are transferable and can be issued by scheduled commercial banks (excluding RRBs and Local Area Banks) and selected all-India financial institutions permitted by the RBI. They can be issued to individuals, companies, corporations, trusts, funds and associations. CDs have specific maturity periods and are subject to SLR and CRR requirements. They are a valuable way for financial institutions to manage liquidity and raise funds. Call Money/Notice Money: The call money/notice money market is a vital component of the Indian money market, providing very short-term funds. Call money refers to loans repayable on demand within one day, while notice money has a maturity period of up to 14 days. No collateral security is needed in this market. It is highly liquid yet risky and volatile. Scheduled and non-scheduled commercial banks, foreign banks, state, district, and urban cooperative banks, as well as the Discount and Finance House of India, participate in this market. Brokers and dealers in stock exchanges also borrow funds from the call money market.
5. Write in brief about lenders and borrowers in the Indian Money Market.
Ans: The Indian Money Market involves a range of participants, both lenders and borrowers, who play essential roles within its framework. These participants contribute to the smooth functioning of the market, enabling funds to flow where they are needed.
(i) Lenders in the Organized Sector are:
(i) State Bank of India (i) Joint Stock Commercial Banks (Scheduled and Non-Scheduled) (iii) Cooperative Banks (iv) Exchange Banks/Foreign Banks (v) Regional Rural Banks (vi) Development Banks and Other Financial Institutions: This category includes organizations like IFCI, SFCs, SIDC, NABARD, LICI, GICI, among others. (vii) Discount and Finance House of India ii.
(ii) Lenders in the Unorganized Sector are:
(i) Indigenous Bankers
(ii) Money Lenders
(iii)Borrowers in the Indian Money Market:
On the borrowing side, various participants seek funds from the Indian Money Market like: (ii) State Government (iii) Local Bodies: Municipalities, Village
(i) Central Government Panchayats, etc. (iv) Traders (v) Industrialists (vi) Farmers (vii) Exporters and Importers (viii) General Public
This diverse group of lenders and borrowers collectively fuels the activities of the Indian Money Market, enabling the circulation of funds for economic growth and development.
6. Short Answer Type:
i. In which year was the DFHI established?
Ans: DFHI (Discount and Finance House of India) was established in the year 1988.
ii. What is ‘ad hocs’?
Ans:- “Ad hocs’ refers to a type of Treasury Bills that are issued only to the Reserve Bank of India (RBI) and can be purchased by the RBI. These bills allow the RBI to issue currency notes against them and provide a means for the Central Government to raise finance.
iii. Give two examples of schedules for private and public banks.
Ans:- Scheduled Public Sector Banks: Two examples of Scheduled Public Sector Banks are: State Bank of India (SBI) and Punjab National Bank (PNB). Scheduled Private Sector Banks: Two examples of Scheduled Private Sector Banks are HDFC Bank Ltd. And ICICI Bank Ltd.
iv. Differences Between Ordinary Treasury Bills and ‘Ad Hocs’ Treasury Bills.
Ans: The following are the differences between Ordinary Treasury Bills and ‘Ad Hocs’ Treasury Bills.
| Feature | Ordinary Treasury Bills | ‘Ad Hocs’ Treasury Bills |
|---|---|---|
| Purpose | Issued for regular government financing purposes | Issued for specific, often one-time, financing needs of the government |
| Frequency of Issuance | Issued regularly, often on a schedule set by the government | Issued irregularly, as and when needed by the government |
| Maturity Period | Typically short-term, ranging from a few days to one year | Can vary widely, depending on the specific financing need, but often short-term |
| Volume and Frequency of Issuance | Generally issued in large volumes and regularly | Issued in smaller volumes and less frequently |
| Market Impact | Often well anticipated by market participants, with predictable impact on interest rates | May have a more significant impact on the market due to their irregular nature, potentially causing fluctuations in interest rates |
| Use Cases | Used by governments to manage short-term cash flows and meet regular financing needs | Used for emergency funding, unforeseen expenses, or other ad hoc government expenditures |
| Market Perception | Generally considered safer and more stable investments due to their regularity and predictability | May be perceived as slightly riskier due to their irregularity and potential association with unexpected financial needs |
v. What are the different classifications of treasury bills based on their periodicity?
Ans: Treasury bills can be classified into three categories based on their periodicity:
(i) 91-day Treasury Bills: These are short-term treasury bills with a maturity period of 91 days. They serve as a means for the government to raise funds for a period of approximately three months.
(ii) 182-day Treasury Bills: Treasury bills with a maturity period of 182 days fall under this category. These bills provide the government with short-term financing for around six months.
(iii) 364 days Treasury Bills: Treasury bills with a maturity period of 364 days belong to this classification. They offer the government a source of funds for nearly one year.
vi. How is a bill of exchange defined according to the Negotiable Instruments Act, of 1881?
Ans: According to Section 5 of the Negotiable Instruments Act, of 1881, A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
vii. What is the nature of bills of exchange in trade transactions?
Ans: Bills of exchange, also known as trade bills, arise from legitimate trade transactions. These negotiable. instruments are drawn by the seller (drawer) on the buyer (drawee) for the value of goods supplied. They signify a credit transaction where the buyer agrees to pay the stated amount after a specified time.
viii. How do trade bills transform into commercial bills?
Ans: When commercial banks accept these trade bills, they transform into commercial bills. The acceptance by banks adds an element of assurance, making them more reliable. These bills are recognized as a form of short-term financing and contribute to the smooth flow of trade-related funds.
ix. What are the different types of commercial bills?
Ans: The various types of Commercial bills are:
a. Demand Bills and Usance Bills: Demand bills are payable immediately upon presentation, while usance bills allow a specified period (usance) for payment.
b. Clean Bills and Documentary Bills: Clean bills don’t involve any accompanying documents, whereas documentary bills come with supporting documents like invoices, bills of lading, etc.
c. Inland Bills and Foreign Bills: Inland bills involve transactions within the country, while foreign bills relate to international trade.
d. Export Bills and Import Bills: Export bills are drawn by the seller on the overseas buyer, while import bills are drawn by the foreign seller on the domestic buyer.
e. Accommodation Bills and Supply Bills: Accommodation bills are for securing loans without any real trade, while supply bills arise from genuine trade transactions.
f. Indigenous Bills (Hundi): Indigenous bills, also known as “Hundi,” are traditional and often used in indigenous trading systems.
X. Which entities are authorized to issue Certificates of Deposits?
Ans: Certificate of Deposits can be issued by:
i) Scheduled Commercial Banks (excluding RRBs and Local Area Banks): These are established banks with regular banking operations and a schedule of operations recognized by the Reserve Bank of India (RBI).
ii) Selected All-India Financial Institutions with RBI Permission: Certain prominent all-India financial
institutions, as approved by the RBI, are allowed to issue Certificates of Deposits.
xi. Who can be recipients of Certificate of Deposits?
Ans: Certificate of Deposits can be issued to a variety of entities, which includes- Individuals, Companies, Corporations, Trusts, Funds and Associations.
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