Financial Markets & SEBI
The money market and the capital market — their instruments, the primary vs secondary market, stock exchanges and indices, and the role of SEBI as regulator.
Key Takeaways
- The money market handles short-term funds (under one year) and is regulated by the RBI.
- The capital market handles long-term funds and is regulated by SEBI.
- SEBI (statutory since 1992) protects investors and regulates the securities market.
Core concept
Financial markets channel savings to investment — connecting those with surplus funds to those who need them. They are split by time horizon: the money market (short-term) and the capital market (long-term). Efficient markets lower the cost of capital and finance economic growth.
Static foundation — money vs capital market
Money Market vs Capital Market
| Feature | Money Market | Capital Market |
|---|---|---|
| Time horizon | Short-term (less than 1 year) | Long/medium-term (over 1 year) |
| Instruments | Treasury Bills, Commercial Paper, Certificates of Deposit, Call Money | Shares, debentures, bonds, mutual funds, derivatives |
| Regulator | Reserve Bank of India (RBI) | Securities and Exchange Board of India (SEBI) |
| Purpose | Manage short-term liquidity | Raise long-term capital for investment |
Primary vs Secondary Market — and Key Terms
Tap to reveal.
SEBI — the market regulator
SEBI was established in 1988 and given statutory powers in 1992. Its three-fold mandate: protect investors, regulate the securities market (exchanges, brokers, mutual funds), and develop the market. It has quasi-legislative, quasi-executive and quasi-judicial powers.
Current affairs linkage
Growing themes: the surge in retail investors and demat accounts, mutual-fund SIP inflows, corporate-governance and disclosure norms, and the regulation of F&O / derivatives trading. (Add the latest SEBI regulation or market-participation data.)
Prelims trap zones
- Money market → RBI; Capital market → SEBI — a very common regulator mix-up.
- Treasury Bills are money-market (short-term) instruments; government bonds/dated securities are capital-market instruments.
- FDI is 'stable' capital; FPI is 'hot money' that can leave quickly, causing volatility.
Prelims Pointers
- Money-market instruments: Treasury Bills, Commercial Paper, Certificates of Deposit, Call Money.
- The primary market is where new securities are issued (IPO); the secondary market is where they are traded (stock exchange).
- The BSE (1875) is Asia's oldest stock exchange; its index is the Sensex (30 stocks). The NSE's index is the Nifty (50).
- SEBI regulates the capital market; the RBI regulates the money market.
Mains Angle
- 'A deep and well-regulated capital market is essential for financing growth.' Discuss SEBI's role.
- Distinguish between FDI and FPI and their implications for the economy.
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