ROLE OF RBI AS CENTRAL BANK

1. Currency Issue: Reserve bank of India is the only authority who is authorized to issue currency in
India. RBI also works to prevent counterfeiting of currency by regularly upgrading security features of
currency.

2. Banker to the GoI: RBI maintains its accounts, receive and make payments out of these accounts. RBI
also helps GoI to raise money from public via issuing bonds and government approved securities.

3. Supervisor of Banks: Bankers’ Bank: RBI also works as banker to all the scheduled commercial banks.
All the banks in India maintain accounts with RBI which help them in clearing & settling inter-bank
transactions and customer transactions smoothly & swiftly. Maintaining accounts with RBI help banks to
maintain statutory reserve requirements. RBI also acts as lender of last resort for all the banks.

4. RBI as Country’s Foreign Exchange Manager: RBI has an important role to play in regulating &
managing Foreign Exchange of the country. It manages forex and gold reserves of the nation.

5. RBI as Controller of Credit: Regulator of Money supply: RBI formulates and implements the Monetary
Policy of India to keep the economy on growth path. Monetary Policy refers to the process employed by
RBI to control availability & cost of currency and thus keeping Inflationary & deflationary trends low and
stable. The measures adopted by RBI can be broadly categorized as:

Quantitative Tools: Quantitative measures of credit control are applicable to entire money and banking
system without discriminations.

- CRR (): The ratio specifies minimum fraction of the total deposits of customers, which commercial
banks have to hold as reserves either in cash or as deposits with the central bank.

- SLR (): The share of net demand and time liabilities that banks must maintain in safe and liquid assets,
such as government securities, cash and gold is SLR.

- Bank Rate (): When banks want to borrow long term funds from RBI, it is the interest rate which RBI
charges from them.

- Repo Rate (): If banks want to borrow money (for short term, usually overnight) from RBI, the banks
have to pay this interest rate. Banks have to pledge government securities as collateral.

- Reverse Repo Rate (): Reverse repo rate is just the opposite of repo rate. If a bank has surplus money,
they can park this excess liquidity with RBI and central bank will pay interest on this.

- Open Market Operations (OMO): Open market operation is the activity of buying and selling of
government securities in open market to control the supply of money in banking system. (When there is
excess supply of money, RBI sells government securities thereby taking away excess liquidity and vice
versa)
- Marginal Standing Facility (MSF) (%): Banks can borrow up to 2.5% of their respective Net Demand and
Time Liabilities. he important difference with repo rate is that bank can pledge government securities
from SLR quota (up to 1%).

Qualitative Tools: Qualitative measures of credit control are discriminatory in nature and are applied for
specific purpose or to specific financial institutions which are violating the monetary policy norms.

- LTV or Margin Requirements: Loan to Value (LTV) is the ratio of loan amount to the actual value of
asset purchased. RBI regulates this ratio so as to control the amount bank can lend to its customers.

- Selective credit control: RBI can specifically instruct banks not to give loans to traders of certain
commodities. This prevents speculations/hoarding of commodities using money borrowed from banks.

- Moral Suasion: RBI persuades bank through meetings, conferences, media statements to do specific
things under certain economic trends. An example of this measure is to ask banks to reduce their Non-
performing assets (NPAs).

PAYMENTS BANK

Payment banks,

→ Set up based on the recommendations of the Nachiket Mor Committee,

→ The main objective is to advance financial inclusion by offering banking and financial services
to the unbanked and underbanked areas, helping the migrant labor force, low-income households,
small entrepreneurs etc.

→ India currently has 6 Payment Banks namely, Airtel Payment Bank, India Post Payment Bank,
Fino, Paytm Payment Bank, NSDL Payment Bank and Jio Payment Bank.

Features of Payment Banks

→ They are differentiated and not universal banks.

→ These operate on a smaller scale.

→ It needs to have a minimum paid-up capital of Rs. 100,00,00,000.

 Activities That Can Be Performed By Payment Banks

→ Payment banks can take deposits up to Rs. 2,00,000. It can accept demand deposits in the
form of savings and current accounts.

→ The money received as deposits can be invested in secure government securities only in the
form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the demand deposit balance. The
remaining 25% is to be placed as time deposits with other scheduled commercial banks.

→ Payments banks will be permitted to make personal payments and receive cross border
remittances on the current accounts.

→ It can issue debit cards.

Activities That Cannot Be Undertaken By Payment Banks

→ Payment banks receive a ‘differentiated’ bank license from the RBI and hence cannot lend.

→ Payment banks cannot issue credit cards.

→ It cannot accept time deposits or NRI deposits.

→ It cannot issue loans.

→ It cannot set up subsidiaries to undertake non-banking financial activities.

Advantages of Having Payment Banks

→ Expansion of rural banking and financial inclusion.

→ Expansion of the formal financial system.

→ Effective alternative to commercial banks.

→ Efficiently deals with low value, high volume transactions.

→ Access to diversified services.

Challenges Faced by Payment Banks

→ Lack of awareness among the masses to access these services.

→ Lack of incentives for the agents to involve themselves in these activities.

→ Lack of infrastructure and access to operational resources.

→ Technological hurdles
 • ASBA (Application Supported by Blocked Amounts)

• → ASBA exempts retail investors from making the full payment & instead lets
certain amount facilitate the application till the completion of the allotment.

• → It contains authorization to block the application money in a bank account.

• → No Interest Loss: ASBA ensures that investors' funds remain in their bank accounts,
earning interest until the finalization of the allotment process. This eliminates the interest
loss that would occur if the funds were transferred to the issuer during the application
process.

• → Multiple Applications: ASBA allows investors to submit multiple applications for a

single public issue. However, the total bid amount across all applications should not
exceed the maximum limit specified by the issuer.

• → Convenience and Cost Savings: ASBA simplifies the application process by

eliminating the need for writing and submitting physical application forms and making
payments through checks or demand drafts. It saves time and effort for investors and
reduces costs associated with printing, couriering, and processing physical forms.

• → Availability: ASBA facility is available to individual retail investors, non-institutional

investors, and Qualified Institutional Buyers (QIBs) for participating in public issues. It is
supported by most banks across the country.

Role of DFHI in Money Market

1. Primary Dealer in Government Securities: It participates in the primary market
auctions and buys government securities on behalf of its clients, including banks,
financial institutions, and mutual funds. DFHI facilitates the smooth issuance and
distribution of government securities, thereby supporting the government's borrowing
program.
2. Market Maker: It provides liquidity by actively quoting bid and offer prices for
government securities, thereby facilitating secondary market transactions
3. Trading and Treasury Operations: DFHI engages in trading activities in the money
market, including short-term instruments such as treasury bills, commercial paper,
 certificates of deposit, and other money market instruments. It manages its own
treasury operations and conducts trades on its own behalf to earn profits.
4. Money Market Development: DFHI plays a crucial role in the development and growth
of the money market in India. It helps in deepening the market by providing liquidity,
market-making services, and trading expertise. DFHI's presence adds to the overall
efficiency and effectiveness of the money market, promoting a well-functioning financial
system.
5. Relationship with Market Participants: DFHI maintains relationships with various
market participants, including banks, financial institutions, and other entities operating in
the money market. It acts as a trusted intermediary and provides financial services,
including money market instruments, treasury operations, and investment advisory
services.

▪ monetary policy,

• Structure of MPC

• → The RBI Monetary Policy Committee (MPC) is a 6 member committee. It

consists of three internal members and three external experts.

• → RBI Governor as its ex officio chairperson

• → The MPC is required to meet at least four times in a year. The quorum for the
meeting of the MPC is four members.

• → Each Member of the Monetary Policy Committee writes a statement specifying

the reasons for voting in favor of, or against the proposed resolution.

• → The Reserve Bank is obligated to issue a document called the Monetary Policy
Report every six months to explain the origins of inflation and inflation estimates
for the next six to eight months.

• The Monetary Policy Report

• → Once in every six months, the Reserve Bank publishes the Monetary Policy Report
containing the following elements:
 •

1. Explanation of inflation dynamics in the last six months and the

near term inflation outlook;
2. Projections of inflation and growth and the balance of risks;
3. An assessment of the state of the economy, covering the real
economy, financial markets and stability, fiscal situation, and the
external sector, which may entail a bearing on monetary policy
decisions;
4. An updated review of the operating procedure of monetary policy;
and
5. An assessment of projection performance.

• Monetary Policy Committee Meeting (February 2023)

• On the basis of an assessment of the current and evolving macroeconomic situation, the
Monetary Policy Committee (MPC) at its meeting held on February 8, 2023 decided to:

• → Increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis
points to 6.50 per cent with immediate effect.

• → Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.25 per cent
and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

• → Keep the Cash Reserve Ratio and Statutory Liquidity Ratio at 4.5 per cent and 18 per
cent respectively.

…………………………………………………………………………

• Margin Trading

• In the stock market, margin trading refers to the process whereby individual
investors buy more stocks that they can afford to by the means of trading via
borrowed securities. As margin trading can be done on both buy/sell side, it helps in
increasing demand and supply of funds in the market, in turn contributing towards better
liquidity.
 • Margin is the amount of money that a trader needs to deposit with a broker in order to
enter into a trade. It is usually expressed as a percentage of the total trade value.

• Ex. An investor purchases Rs.100 worth of X, with a sum of Rs.50 of his own money,
and rest 50 is the borrowed money (Margin is 50%). If X rises to 110, he will earn a
return of 20% (10/50*100), if X falls by 10%, he will lose 20%. Thus, margin trading
exposes clients to higher potential gain/loss.

• Note: A client interest to do margin trading is required to sign an agreement with lender
of funds to formalize the agreement for margin trading which provides the margin rate
and the extent of the margin.

• Margin Rate: Margin rate refers to the interest rate that a broker charges on the
margin loan extended to a trader.

• The agreement provides for two types of margin:

1. Initial Margin: Portion of purchase value which the client deposits with the lender
of the funds before the actual purchase. The securities then purchased are kept as
collateral with the lender.
2. Maintenance Margin: In addition, it is the minimum amount of money or
collateral that an investor must maintain in their account to keep a trade open. It's
usually a percentage of the trade's value, and if the account balance falls below
this level, the broker may issue a margin call, requiring the trader to add more
funds or collateral to the account to bring it back up to the required level. If
margin call is not met, the lender can sell the collateral, partially or fully, to
increase the equity.

Imp: the initial margin is the minimum amount of margin required to enter into a new position,
while the maintenance margin is the minimum amount of margin required to keep the position
open. The initial margin provides a cushion for potential losses, while the maintenance margin
ensures that the trader has sufficient funds or securities to cover potential losses during the life of
the position.

• For example, assume that the initial and maintenance margins are 50% and 25%
respectively.

• A client has bought securities for Rs. 100. The price depreciates by 40%. The value of
portfolio reduces to Rs. 60. The equity becomes Rs. 10 (Rs. 60 – Rs. 50 (debt)), which is
less than Rs. 15 (25% of the value of securities). The client is required to bring in Rs. 5.
When the equity in the margin account falls below the maintenance margin, the lender
makes a margin call. If margin call is not met, the lender can sell the collateral, partially
or fully, to increase the equity.
 •

• Margins (Way of Risk Management)

1. VaR Margin: Value at Risk margin is mandated by SEBI. In general, VAR

means by how much the portfolio can go up or down as per historical data
analysis in one day. The VaR margin is a margin intended to cover the largest loss
that can be encountered on 99% of the days (99% value at risk).

o For liquid stocks, the margin covers one day losses, while for illiquid stocks it
covers three-day losses so as to allow the exchange to liquidate the position over
three days.
o For liquid stocks, the VaR margins are based only on the volatility of the stock,
while for other stocks, the volatility of the market index is also used in the
computation.

• Security Sigma – volatility of the security computed as at the end of the previous trading
day

• Security VaR – higher of 7.5% or 3.5*security sigma (3.5 times the volatility)

• Index Sigma – daily volatility of the market index computed as at the end of the previous
trading day

• Index VaR – higher of 5% or 3 * index sigma

• b. MTM (Mark to Market Margin): Mark to Market margin is calculated by marking

each transaction in security to the closing price of the security at the end of the trading. In
case it is not traded on a particular day, then latest NSE closing price is considered to be
its closing prices. MTM is collected from the member before the start of the trading of
the next day.

…………………………………………………………..

▪ Questions 2019

NBFCs and its types; (AF I L NBF)

• Types:

1. Asset Finance Company (AFC): An AFC is an NBFC that provides finance

primarily for the purchase of physical assets such as vehicles, machinery, and
equipment. AFCs may also provide finance for the construction of
infrastructure projects such as roads, bridges, and buildings.
 2. Investment Company (IC): An IC is an NBFC that primarily invests in
shares, bonds, and other securities. ICs do not provide loans or other credit
facilities to customers.
3. Loan Company (LC): An LC is an NBFC that provides loans and credit
facilities to individuals and businesses. LCs may specialize in providing loans
for specific purposes such as education, housing, or agriculture.
4. Non-Banking Financial Company-Factoring (NBFC-Factoring): NBFC-
Factoring is an NBFC that provides factoring services to businesses.
Factoring involves the purchase of accounts receivable from businesses at a
discount, which helps businesses to generate cash flow and manage their working
capital.
▪ comparison between Banks and NBFCs.

……………………………………………………….
Working of Indian Financial System

Indian Financial system can be broadly classified into the formal (organized) financial
system and the informal (unorganized) financial system.

The formal financial system comes under the purview of the Ministry of Finance
(MoF), the Reserve Bank of India (RBI), the Securities and Exchange Board of India
(SEBI), and other regulatory bodies.

The informal financial system consists of:

- Individual moneylenders such as neighbors, relatives, landlords, traders, and
storeowners.
- Groups of persons operating as ‘funds’ or ‘associations.’ These groups function under a
system of their own rules and use names such as ‘fixed fund,’ ‘association,’ and ‘saving club.’ -
Partnership firms consisting of local brokers, pawnbrokers, and non-bank financial
intermediaries such as finance, investment, and chit-fund companies.

Components of the formal financial system

1. Financial Institutions: These are the intermediaries that mobilize savings and facilitate
the allocation of funds in an efficient manner. They can be classified as banking and non-
banking financial institutions. Banking institutions are creators and sellers of credit while non-
banking financial institutions are sellers of credit. They can be of following types:
- Term-finance institutions such as IDBI, ICICI etc.
- Specialized finance institutions such as export import bank of India (EXIM), NABARD
etc.
- Investment institutions dealing with mutual funds like Unit Trust of India (UTI), public-pvt
mutual funds and insurance activity of LIC, GIC etc.
- State level FI’s such as State Financial Corporation (SFC’s) and State Industrial Development
Corporation (SIDC) etc.

2. Financial Markets: Financial markets are a mechanism enabling participants to deal in

financial claims. The markets also provide a facility in which their demands and requirements
interact to set a price for such claims.
- The main organized financial markets in India are the money market and the capital
market. The first is a market for short-term securities while the second is a market for long-term
securities, i.e., securities having a maturity period of one year or more.
- Financial markets can also be classified as primary and secondary markets. While the
primary market deals with new issues, the secondary market is meant for trading in outstanding
or existing securities.
- There are two components of the secondary market: over-the-counter (OTC) market and the
exchange traded market. The government securities market is an OTC market. In an OTC
market, spot trades are negotiated and traded for immediate delivery and payment while in the
exchange-traded market, trading takes place over a trading cycle in stock exchanges.

(Recently, the derivatives market (exchange traded) has come into existence)

3. Financial Instruments: A financial instrument is a claim against a person or an

institution for payment, at a future date, of a sum of money and/or a periodic payment in
the form of interest or dividend. Financial instruments represent paper wealth shares,
debentures, like bonds and notes.
They are marketable and tradeable.
Financial instruments help financial markets and financial intermediaries to perform the
important role of channelizing funds from lenders to borrowers.
2 types:
- Primary securities are also termed as direct securities as they are directly issued by the
ultimate borrowers of funds to the ultimate savers. Examples of primary or direct
securities include equity shares and debentures.
- Secondary securities are also referred to as indirect securities, as they are issued by the
financial intermediaries to the ultimate savers. Bank deposits, mutual fund units, and
insurance policies are secondary securities.

4. Financial Services: The major categories of financial services are funds intermediation,
payments mechanism, provision of liquidity, risk management, and financial engineering.
- Funds intermediating services link the saver and borrower which, in turn, leads to capital
formation.
- Payment services enable quick, safe, and convenient transfer of funds and settlement of
transactions
- Financial liquidity of financial claims is enhanced through trading in securities.
- Financial services are necessary for the management of risk in the increasingly complex global
economy.
- Financial engineering refers to the process of designing, developing, and implementing
innovative solutions for unique needs in funding, investing, and risk management.

Functions of a financial system

→ It plays a vital role in the economic development of the country as it encourages both
savings and investment
→ It helps in mobilising and allocating one’s savings
→ It facilitates the expansion of financial institutions and markets
→ Plays a key role in capital formation
→ It is also concerned with the Provision of funds
→ Helps in risk management through funds.
……………………………………………………………………………………………………………………………………………………………
….

o Entry norms for ipo

Primary and Secondary market,

•
……………………………………………………………………………………………………………………………………………………………
………………………………………….

o Raising of funds in International Markets:

▪ ADRs and GDRs, FCCB and Euro Issues;

• Below listed are the instruments that can be used by domestic firms to raise money
from the international markets:

• ADRs: An American depositary receipt (ADR) is a negotiable certificate issued by a U.S.

depository bank representing a specified number of shares—or as little as one share—
investment in a foreign company's stock. The ADR trades on markets in the U.S. as any
stock would trade. ADRs represent a feasible, liquid way for U.S. investors to purchase
stock in companies abroad. Foreign firms also benefit from ADRs, as they make it easier
to attract American investors and capital—without the hassle and expense of listing
themselves on U.S. stock exchanges. The certificates also provide access to foreign listed
companies that would not be open to U.S. investment otherwise.

• GDRs: GDRs are shares of a single foreign company issued in more than one country as
part of a GDR program. Companies can issue depositary receipts in individual countries
or they may choose to issue their shares in multiple foreign markets at once through a
GDR. Private markets use GDRs to raise capital denominated in either U.S. dollars or
euros. When private markets attempt to obtain euros instead of U.S. dollars, GDRs are
referred to as EDRs.
•
 • FCCB: A foreign currency convertible bond (FCCB) is a type of convertible bond issued
in a currency different than the issuer's domestic currency. In other words, the money
being raised by the issuing company is in the form of a foreign currency. A convertible
bond is a mix between a debt and equity instrument. It acts like a bond by making regular
coupon and principal payments. A bondholder with a convertible bond has the option of
converting the bond into a specified number of shares of the issuing company.
Convertible bonds have a conversion rate at which the bonds will be converted to equity.

• Euro Issues: Raising of capital outside the home country in foreign currency. The
popularity of Eurobonds as a financing tool reflects their high degree of flexibility as they
offer issuers the ability to choose the country of issuance based on the regulatory market,
interest rates and depth of the market. They are also attractive to investors because they
usually have small par values and high liquidity.

……………………………………………………………………………………………………………………………………………………………
…………………

SEGMENTS OF INDIAN DEBT MARKET

Debt Market Instruments

1. Government Securities: It is the Reserve Bank of India that issues Government

Securities or G-Secs on behalf of the Government of India. These securities have a
maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are
payable semi-annually.

• Zero Default risk is one of the best reasons for investment in G-Sec
• All G-Sec in India have a face value of Rs. 100 and are issued by RBI. G-Sec’s have
semiannual coupon or interest payments with a maturity of 5 to 30 years.
• Higher leverage is available in case of borrowings against G-Secs
• G-Sec bear no TDS on interest payments,

2. Corporate Bonds: These bonds come from PSUs and private corporations and are
offered for an extensive range of tenures up to 15 years. There are also some perpetual
bonds. Comparing to G-Secs, corporate bonds carry higher risks, which depend upon
the corporation, the industry where the corporation is currently operating, the current
market conditions, and the rating of the corporation. However, these bonds also give
higher returns than the G-Secs.
3. State Government Securities: Issued by RBI on behalf of each of the state
governments and are coupon bearing bonds with a face value of Rs. 100 and a fixed
maturity period. They account for 3-4% of daily trading volume. State development
loan is a form of bond which is sold in the market. Each state is allowed to issue
securities up to a certain limit each year. Coupon rates are marginally higher than
 those of GOI secs. They are sold via auction process; interest payment is half-yearly
and other modalities remain similar to G-Secs.
4. Municipal Bonds:

1. Purpose and Usage: Municipal bonds are primarily used to fund

infrastructure projects such as roads, bridges, water supply systems, sewage
treatment plants, solid waste management facilities, and urban development
projects. The proceeds from these bonds enable Urban Local Bodies (ULBs)
to raise capital for public projects without solely relying on government
grants or funds.
2. Tax-Exempt Status: Municipal bonds in India often carry tax benefits to attract
investors. Interest income earned from municipal bonds is tax-exempt for retail
investors, making them more attractive in comparison to other fixed-income
instruments subject to taxation.
3. Participation of Institutional Investors: Municipal bonds primarily attract
participation from institutional investors such as banks, insurance companies,
mutual funds, and pension funds. These investors typically have the expertise and
risk appetite to invest in long-term debt instruments.
4. Importance for Urban Development: Municipal bonds play a crucial role in
funding urban development and infrastructure projects, contributing to the growth
and improvement of cities and towns across India. They help bridge the
infrastructure funding gap, stimulate local economic development, and enhance
the overall quality of urban life.

……………………………………………………………………………………………………………..

Major Reforms in Past Decade

▪ major reforms in the last decade:

▪ Payment banks,

• → Set up based on the recommendations of the Nachiket Mor Committee,

• → The main objective is to advance financial inclusion by offering banking and financial
services to the unbanked and underbanked areas, helping the migrant labor force, low-
income households, small entrepreneurs etc.
• → India currently has 6 Payment Banks namely, Airtel Payment Bank, India Post
Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank and Jio Payment
Bank.

• Features of Payment Banks

• → They are differentiated and not universal banks.

• → These operate on a smaller scale.

• → It needs to have a minimum paid-up capital of Rs. 100,00,00,000.

• Activities That Can Be Performed By Payment Banks

• → Payment banks can take deposits up to Rs. 2,00,000. It can accept demand deposits in
the form of savings and current accounts.

• → The money received as deposits can be invested in secure government securities only
in the form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the demand
deposit balance. The remaining 25% is to be placed as time deposits with other scheduled
commercial banks.

• → Payments banks will be permitted to make personal payments and receive cross border
remittances on the current accounts.

• → It can issue debit cards.

• Activities That Cannot Be Undertaken By Payment Banks

• → Payment banks receive a ‘differentiated’ bank license from the RBI and hence cannot
lend.

• → Payment banks cannot issue credit cards.

• → It cannot accept time deposits or NRI deposits.

• → It cannot issue loans.

• → It cannot set up subsidiaries to undertake non-banking financial activities.

•

• Advantages of Having Payment Banks

• → Expansion of rural banking and financial inclusion.

• → Expansion of the formal financial system.

• → Effective alternative to commercial banks.

• → Efficiently deals with low value, high volume transactions.

• → Access to diversified services.

• Challenges Faced by Payment Banks

• → Lack of awareness among the masses to access these services.

• → Lack of incentives for the agents to involve themselves in these activities.

• → Lack of infrastructure and access to operational resources.

• → Technological hurdles.

▪ GST,

• → Goods and Service Tax (GST) is levied on the supply of goods and services.

• → GST is a single domestic indirect tax law for the entire country.

• Components of GST

• There are three taxes applicable under this system: CGST, SGST & IGST.

• CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a
transaction happening within Maharashtra)

• SGST: It is the tax collected by the state government on an intra-state sale (e.g., a
transaction happening within Maharashtra)
• IGST: It is a tax collected by the Central Government for an inter-state sale (e.g.,
Maharashtra to Tamil Nadu)

• Objectives of GST

▪ Simplify the tax system by replacing multiple indirect taxes with a single
tax.
▪ Ensure transparency and accountability in the tax collection process.
▪ Reduce the tax burden on businesses by eliminating cascading effects of
taxes.
▪ Promote the growth of businesses and improve the ease of doing business
in India.
▪ Create a common national market by removing trade barriers between
states.
▪ Increase revenue collection for the government to fund public welfare
programs.

▪ monetary policy,

• Structure of MPC

• → The RBI Monetary Policy Committee (MPC) is a 6 member committee. It consists of

three internal members and three external experts.

• → RBI Governor as its ex officio chairperson

• → The MPC is required to meet at least four times in a year. The quorum for the meeting
of the MPC is four members.

• → Each Member of the Monetary Policy Committee writes a statement specifying the
reasons for voting in favor of, or against the proposed resolution.

• → The Reserve Bank is obligated to issue a document called the Monetary Policy Report
every six months to explain the origins of inflation and inflation estimates for the next six
to eight months.

• The Monetary Policy Report

• → Once in every six months, the Reserve Bank publishes the Monetary Policy Report
containing the following elements:

1. Explanation of inflation dynamics in the last six months and the

near term inflation outlook;
2. Projections of inflation and growth and the balance of risks;
3. An assessment of the state of the economy, covering the real
economy, financial markets and stability, fiscal situation, and the
external sector, which may entail a bearing on monetary policy
decisions;
4. An updated review of the operating procedure of monetary policy;
and
5. An assessment of projection performance.

• Monetary Policy Committee Meeting (February 2023)

• On the basis of an assessment of the current and evolving macroeconomic situation, the
Monetary Policy Committee (MPC) at its meeting held on February 8, 2023 decided to:

• → Increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis
points to 6.50 per cent with immediate effect.

• → Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.25 per cent
and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

• → Keep the Cash Reserve Ratio and Statutory Liquidity Ratio at 4.5 per cent and 18 per
cent respectively.

▪ Insolvency and Bankruptcy code;

• The Central government introduced the Insolvency and Bankruptcy Code (IBC) in 2016
to resolve claims involving insolvent companies.

•
• Insolvency is a situation where individuals or companies are unable to repay their
outstanding debt.

• Bankruptcy, on the other hand, is a situation whereby a court of competent jurisdiction

has declared a person or other entity insolvent, having passed appropriate orders to
resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability
to pay off debts.

• Objectives of IBC

• → Consolidate and amend all existing insolvency laws in India.

• → To protect the interest of creditors including stakeholders in a company.

• → To revive the company in a time-bound manner.

• → To promote entrepreneurship.

• → To get the necessary relief to the creditors and consequently increase the credit supply
in the economy.

• Features (Also do the sections: asked in 2018 PYP)

1. Time-bound process: The IBC provides for a time-bound process for the
resolution of insolvency cases. The entire process from initiation of insolvency to
the resolution plan must be completed within a maximum of 330 days.
2. Single window clearance (section 60): The IBC provides for a single window
clearance system for insolvency resolution. The National Company Law Tribunal
(NCLT) is the single forum for insolvency resolution, and all cases must be filed
with the NCLT.
3. Resolution professionals (section 16): The IBC provides for the appointment of
a resolution professional (RP) who oversees the entire resolution process. The RP
is responsible for managing the company’s affairs during the insolvency process
and ensures that the interests of all stakeholders are protected.
4. Insolvency resolution plan (sec 25): The IBC provides for the preparation of an
insolvency resolution plan (IRP) by the RP. The IRP outlines the resolution
process, including the identification of assets and liabilities, the management of
the company’s affairs, and the distribution of assets among creditors.
5. Moratorium (sec 14): The IBC provides for a moratorium period of 180 days
during which no legal action can be taken against the company or its assets. This
 is to give the RP time to prepare the IRP and ensure that the company’s affairs are
managed properly.
6. Priority of claims: The IBC provides for the priority of claims in the distribution
of assets among creditors. Secured creditors have the highest priority, followed by
unsecured creditors, and then operational creditors.
7. Liquidation (sec 33 and 35): If the insolvency resolution process is unsuccessful,
the company goes into liquidation. The IBC provides for a time-bound process for
the liquidation of the company’s assets, and the proceeds are distributed among
creditors based on their priority of claims.

………………………………………………………………………………………….

o Short Notes

Algorithmic trading,

• Algorithmic trading is a type of trading that uses powerful computers to run

complex mathematical formulas for trading. Algorithmic trading makes use of much
more complex formulas, combined with mathematical models and human oversight, to
make decisions to buy or sell financial securities on an exchange. Algorithmic traders
often make use of high-frequency trading technology, which can enable a firm to make
tens of thousands of trades per second. Algorithmic trading can be used in a wide variety
of situations including order execution, arbitrage, and trend trading strategies..

• Advantages: Algorithmic trading is mainly used by institutional investors and big

brokerage houses to cut down on costs associated with trading. According to
research, algorithmic trading is especially beneficial for large order sizes that may
comprise as much as 10% of overall trading volume. Algorithmic trading also allows for
faster and easier execution of orders, making it attractive for exchanges

• Disadvantages: The speed of order execution, an advantage in ordinary circumstances,

can become a problem when several orders are executed simultaneously without human
intervention. The flash crash of 2010 has been blamed on algorithmic trading.
Another disadvantage of algorithmic trades is that liquidity, which is created
through rapid buy and sell orders, can disappear in a moment, eliminating the
change for traders to profit off price changes.

………………………………………………………………………

o Universal Banking:
 ▪ need and importance,

• Universal banking is a combination of Commercial banking, Investment banking,

Development banking, Insurance and many other financial activities. It is a place
where all financial products are available under one roof. Universal banking is done by
very large banks. These banks provide a lot of finance to many companies. So, they take
part in the Corporate Governance (management) of these companies. These banks
have a large network of branches all over the country and all over the world. They
provide many different financial services to their clients.

• Advantages

1. Investor Trust: Universal Banks (UB) holds stakes of many companies. These
companies can gain investor confidence, due to the credibility arising from UB
closely watching their activities.
2. Economies of Scale: UB will have higher efficiency arising due to lower costs,
higher output and better products, due to a consolidation of operations.
3. Profitable Diversification: UB can diversify its activities, thus using the same
financial experts to provide a variety of different financial services.
4. Easy Marketing: UB’s can easily sell their products through many branches.
They can ask their existing clients to buy their other products which requires less
marketing due to a well-established name.
5. One-Stop Shopping: All financial products under one roof saving time and
transaction costs, increasing speed of work for bank as well as clients.

• Certain Disadvantages: Different rules and regulations, Monopolisation, Failure can

be costly (Lehman Brothers), Conflict of operations.

…………………………………………………………………..

Commercial paper vs cod

………………………………………………
 Example
Let's say you enter into a futures contract to buy 100 barrels of oil at $50 per barrel.

1. Initial Margin: Suppose the initial margin requirement is $1,000. You deposit this
amount into your margin account.

2. Day 1 Price Movement: At the end of the first trading day, the price of oil rises to $52
per barrel.

• The contract value increases by $2 per barrel for 100 barrels, which is $200.
• Your margin account is credited with this gain of $200, bringing your margin account balance to
$1,200.

3. Day 2 Price Movement: The next day, the price of oil drops to $48 per barrel.

• The contract value decreases by $4 per barrel for 100 barrels, which is a loss of $400.
• Your margin account is debited by this loss of $400, reducing your margin account balance to
$800.

4. Margin Call: If the maintenance margin is set at $900, your account balance of $800 is
below this level. You will receive a margin call and need to deposit an additional $200 to
bring the balance back to the required maintenance margin level.

………………………………………………………………………………………………………

2022 q paper

▪ Mutual Fund and its types -

Mutual Fund:
▪ types of Mutual Funds and different types of schemes,

• Mutual funds are investment vehicles that pool money from multiple investors and invest
the money in a variety of financial assets such as stocks, bonds, and other securities.
There are several types of mutual funds, each with its own investment objective, risk
profile, and investment strategy.

• Here are some of the common types of mutual funds:

1. Equity Funds: Equity funds invest in stocks of companies, either in

a particular sector or across sectors. These funds offer high returns,
but they are also more volatile than other types of mutual funds.
2. Debt Funds: Debt funds invest in fixed-income securities like
bonds, government securities, and corporate debt. These funds aim
to provide stable returns with lower risk than equity funds.
3. Hybrid Funds: Hybrid funds, also known as balanced funds, invest
in a mix of equities and fixed-income securities. These funds aim
to provide a balance between risk and returns.
4. Index Funds: Index funds track a particular index like the S&P 500
or Nifty 50. These funds aim to match the returns of the index they
are tracking.
5. Sector Funds: Sector funds invest in a specific industry sector,
such as technology or healthcare.
6. International Funds: International funds invest in the stock markets
of foreign countries. These funds provide exposure to international
markets and can help diversify an investor's portfolio.
 7. Exchange-Traded Funds (ETFs): ETFs are similar to index funds
but are traded on stock exchanges like individual stocks. They are
passively managed funds that track an index.

• Some common types of schemes offered by mutual funds are:

1. Growth Funds: Growth funds aim to invest in stocks of companies

that have the potential for high growth.
2. Value Funds: Value funds aim to invest in stocks that are
undervalued by the market, with the potential to provide high
returns over time.
3. Dividend Funds: Dividend funds invest in stocks of companies that
pay high dividends to investors.
4. Tax-Saving Funds: Tax-saving funds, also known as ELSS (Equity
Linked Saving Scheme), are designed to provide tax benefits to
investors while investing in equities.
5. Debt Funds: Debt funds invest in fixed-income securities like
bonds, government securities, and corporate debt. These funds aim
to provide stable returns with lower risk than equity funds.
6. Liquid Funds: Liquid funds invest in highly liquid money market
instruments like treasury bills, certificates of deposit, and
commercial paper. These funds are ideal for short-term
investments.
7. Retirement Funds: Retirement funds are designed to provide a
regular income stream to investors after they retire. These funds
invest in a mix of equities and fixed-income securities to provide
stable returns.

▪ concept of NAV, (Net Asset Value)

• NAV is calculated by dividing the total value of all the cash and securities in a fund's
portfolio, minus any liabilities, by the number of outstanding shares.

• In other words, it is the per-unit price of a mutual fund.

• The NAV of a mutual fund changes every day based on the performance of the
underlying assets. For example, if the value of a fund's underlying assets increases, the
NAV of the fund will increase. Conversely, if the value of the assets decreases, the NAV
of the fund will decrease.
 • Investors use the NAV to determine the value of their investment in a mutual fund. For
example, if an investor owns 100 units of a mutual fund and the NAV is Rs. 20, the value
of the investor's investment is Rs. 2,000 (100 units x Rs. 20 NAV).

• It's important to note that the NAV only represents the value of the mutual fund's assets
and liabilities at a particular point in time, and it does not take into account any fees or
expenses associated with investing in the fund. Therefore, investors should consider other
factors like expense ratio, past performance, and investment strategy while making
investment decisions in mutual funds.

…………………………………………………

▪ CAMELS rating system,

• The CAMELS rating system is a supervisory framework used by banking regulators to

assess the safety and soundness of banks.

• The acronym CAMELS stands for six key components of bank evaluation: Capital
adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market
risk. Each of these components is evaluated on a scale of 1 to 5, with 1 indicating the
strongest rating and 5 indicating the weakest rating.

• Here's a brief overview of each component of the CAMELS rating system:

1. Capital adequacy: This component assesses whether a bank has enough capital to
cover its risks. The regulator looks at the bank's Tier 1 capital ratio, which
measures the bank's Tier 1 capital as a percentage of its risk-weighted assets. A
higher ratio indicates a stronger capital position.
2. Asset quality: This component looks at the quality of a bank's assets, such as
loans and investments. The regulator evaluates the bank's non-performing assets
(NPAs), loan-loss reserves, and other factors that may impact the quality of the
bank's assets. A higher percentage of NPAs indicates weaker asset quality.
3. Management: This component evaluates the bank's management practices and the
effectiveness of its internal controls. The regulator looks at the qualifications and
experience of the bank's management team, as well as its risk management
policies and practices. A weaker management rating may indicate issues with
governance, decision-making, or strategy.
4. Earnings: This component assesses the bank's profitability and revenue
generation. The regulator looks at the bank's net interest margin, return on assets
(ROA), and other financial metrics that impact earnings. A weaker earnings rating
may indicate that the bank is not generating enough revenue to cover its expenses
and losses.
5. Liquidity: This component evaluates the bank's ability to meet its short-term
obligations. The regulator looks at the bank's liquidity ratio, which measures its
ability to convert assets into cash quickly. A lower liquidity ratio indicates weaker
liquidity.
 6. Sensitivity to market risk: This component assesses the bank's exposure to market
risks, such as interest rate risk and foreign exchange risk. The regulator looks at
the bank's sensitivity to changes in market conditions and its ability to manage
these risks effectively. A higher sensitivity to market risk indicates a weaker
rating.

• The CAMELS rating system is used by regulators to identify banks that may be
experiencing financial difficulties or facing operational challenges. The ratings can help
regulators decide whether to take corrective action, such as requiring the bank to increase
its capital reserves or improve its risk management practices. Banks that receive weaker
CAMELS ratings may be subject to closer regulatory scrutiny and may face additional
regulatory requirements.

…………………………………..

• Process of Trading Securities

1. Selecting a broker/sub-broker: A person cannot trade on the stock market in his

own individual capacity, transactions can only occur through a broker/sub-broker.
Broken can be an individual or partnership or a company or a financial institution
(bank) registered under SEBI.
2. Opening A Demat Account: All securities are in electronic format. The
dematerialized account must thereby be opened to trade electronic securities.
Demat account can be opened up with depository participant, there are two in
India namely Central Depository Services Ltd. & National Depository Services
Ltd.
3. Placing Orders: The order will be placed via the broker. The order instruction
should be very clear. Ex. Buy 100 shares of XYZ Co. for a price of Rs. 140 or
less. The broker will then act according to your demand, and place and order for
the share at the price mentioned or even at a better price if available, following
which he will issue an order confirmation slip to the investor.
4. Execution of the Order: Once the broker receives order from the investor, he
executes it, and within 24 hours he must issue a contract note, which is a
document containing necessary information about the transaction like the number
of shares transacted, price-date-time of transaction, brokerage amount etc. In case
of a legal dispute, it is an evidence of the transaction and contains the Unique
Order Code assigned to it by the stock exchange.
5. Settlement: Here the actual securities are transferred from the buyer to the seller.
And the funds will also be transferred. Here too the broker will deal with the
transfer. There are two types of settlements,

• - On the Spot settlement: Here we exchange the funds immediately and the settlement
follows the T+2 pattern. So, a transaction occurring on Monday will be settled by
Wednesday (by the second working day)
 • -Forward Settlement: Simply means both parties have decided the settlement will take
place on some future date. Can be T+9 etc.

o Settlement mechanism at BSE & NSE.

• → Compulsory Rolling Settlement Segment (CRS): With effect from December 31,
2001, trading in all securities takes place in one market segment, viz., Compulsory
Rolling Settlement Segment (CRS).

• → A T+2 settlement cycle means that the final settlement of transactions done on T, i.e.,
trade day by exchange of securities between the buyers and sellers respectively takes
place on second business day (excluding Saturdays, Sundays, bank and Exchange trading
holidays) after the trade day.

• → All transactions in all groups of securities (even ‘G’) in the Equity segment and Fixed
Income

• securities listed on BSE are required to be settled on T+2 basis.

• → "Z" group or "T" group, are settled only on a gross basis and the facility of netting of
buy and sell transactions in such securities is not available.

• → Trade Confirmation: Once a trade is executed, both the buyer and the seller receive
trade confirmation notes that provide details of the trade, including the quantity, price,
and settlement date. These confirmations help ensure accuracy and transparency in the
settlement process.

• → Benefits: Enhanced liquidity, quicker settlement cycles, reduced counterparty risk, and
improved market efficiency. It allows for timely and efficient clearing and settlement of
trades, ensuring smooth and transparent functioning of the equity market.

……………………

Demat a/c

A Demat (Dematerialized) system is an electronic method for holding and trading shares and securities,
replacing traditional paper certificates. It provides several key benefits:

1. **Electronic Storage**: Securities are stored digitally, eliminating risks like loss, theft, or damage of
physical certificates.

2. **Efficient Transfers**: Transferring shares is quicker and more efficient, usually settling within two
days (T+2).

3. **Reduced Paperwork**: Less paperwork simplifies transactions and reduces errors.

4. **Lower Costs**: Reduces costs associated with printing and handling physical certificates.

5. **Enhanced Security**: Digital records are more secure, with strict regulations and oversight by
depository participants (DPs).

6. **Unified Holdings**: Investors can hold various types of securities (shares, bonds, mutual funds) in a
single demat account.

The demat system enhances convenience, efficiency, transparency, and security in managing and
trading securities.

……………………………………………………………….

SEBI

Role of SEBI:
This regulatory authority acts as a watchdog for all the capital market participants and its main purpose
is to provide such an environment for the financial market enthusiasts that facilitate the efficient and
smooth working of the securities market. SEBI also plays an important role in the economy.

To make this happen, it ensures that the three main participants of the financial market are taken care
of, i.e. issuers of securities, investors, and financial intermediaries.

1. Issuers of securities

These are entities in the corporate field that raise funds from various sources in the market. This
organization makes sure that they get a healthy and transparent environment for their needs.

2. Investor

Investors are the ones who keep the markets active. This regulatory authority is responsible for
maintaining an environment that is free from malpractices to restore the confidence of the general
public who invest their hard-earned money in the markets.

3. Financial Intermediaries

These are the people who act as middlemen between the issuers and investors. They make the financial
transactions smooth and safe.

Functions of SEBI:
1. Protective Functions

As the name suggests, these functions are performed by SEBI to protect the interest of investors and
other financial participants.
It includes-

• Checking price rigging

• Prevent insider trading
• Promote fair practices
• Create awareness among investors
• Prohibit fraudulent and unfair trade practices

2. Regulatory Functions
These functions are basically performed to keep a check on the functioning of the business in the
financial markets.

These functions include-

• Designing guidelines and code of conduct for the proper functioning of financial intermediaries
and corporate.
• Regulation of takeover of companies
• Conducting inquiries and audit of exchanges
• Registration of brokers, sub-brokers, merchant bankers etc.
• Levying of fees
• Performing and exercising powers
• Register and regulate credit rating agency

3. Development Functions

This regulatory authority performs certain development functions also that include but they are not
limited to-

• Imparting training to intermediaries

• Promotion of fair trading and reduction of malpractices
• Carry out research work
• Encouraging self-regulating organizations
• Buy-sell mutual funds directly from AMC through a broker

…………………………………………………..

o Call Money Markets,

• The call money market is a market for very short-term funds repayable on demand and
with a maturity period varying between one day to a fortnight.
 •

• When money is borrowed or lent for a day, it is known as call (overnight) money.
Intervening holidays and/or Sundays are excluded for this purpose. When money is
borrowed or lent for more than a day and upto 14 days, it is known as notice money.

• Call money is required mostly by banks. Commercial banks borrow money without
collateral from other banks to maintain a minimum cash balance known as the cash
reserve requirement (CRR). This interbank borrowing has led to the development of the
call money market.

• CRR is an important requirement to be met by all commercial banks. Once every

fortnight on a reporting Friday, banks have to satisfy reserve requirements which often
entails borrowing in the call/notice money market.

• Participants - Scheduled commercial banks (excluding RRBs), co-operative banks (other

than Land Development Banks) and Primary Dealers (PDs), are permitted to participate
in call/notice money market both as borrowers and lenders.

• Trading - The call/notice money transactions can be executed either on NDS-Call, a

screen–based, negotiated, quote-driven electronic trading system managed by the
Clearing Corporation of India (CCIL), or Over The Counter (OTC) through bilateral
communication.

Call Rate
• The interest rate paid on call loans is known as the ‘call rate.’ It is a highly volatile rate. It
varies from day-to-day, hour-to-hour, and sometimes even minute-to-minute.

• Now the rate is freely determined by the demand and supply forces in the call money
market.

• The interest rate in the call and notice money market is determined by the prevailing
MIBOR rate.
 • MIBOR stands for the Mumbai Interbank Offered Rate. MIBOR is calculated by
obtaining a weighted average of call money transactions of a panel of selected banks.

• The banks use MIBOR as a benchmark rate to price their lending and borrowing
transactions in the call and notice money market. For example, if the MIBOR rate is 5%,
a bank may lend funds to another bank at a slightly higher rate of, say, 5.5% in the call
money market.

• It is also used as a benchmark for setting the interest rates of other financial instruments,
such as floating rate bonds and mortgages.

Link Between the Call Money Market and Other Financial

Markets
• There is an inverse relationship between call rates and short-term money market
instruments such as certificates of deposit and commercial papers. When call rates peak
to a high level, banks raise more funds through certificates of deposit. When call money
rates are lower, many banks fund commercial papers by borrowing from the call money
market and earn profits through arbitrage between money market segments.

• A large issue of government securities also affects call money rates. When banks
subscribe to large issues of government securities, liquidity is sucked out from the
banking system. This increases the demand for funds in the call money market which
pushes up call money rates. Similarly, a rise in the CRR or in the repo rate absorbs excess
liquidity and call rates move up.

• The call money market and the foreign exchange market are also closely linked as there
exist arbitrage opportunities between the two markets. When call rates rise, banks borrow
dollars from their overseas branches, swap them for rupees, and lend them in the call
money market. At the same time, they buy dollars forward in anticipation of their
repayment liability. This pushes forward the premia on the rupee– dollar exchange rate.

• It happens many a times that banks fund foreign currency positions by withdrawing from
the call money market. This hikes the call money rates.

……………………………………………………………

4. Municipal Bonds: Already covered above

 1. Purpose and Usage: Municipal bonds are primarily used to fund infrastructure
projects such as roads, bridges, water supply systems, sewage treatment plants,
solid waste management facilities, and urban development projects. The proceeds
from these bonds enable Urban Local Bodies (ULBs) to raise capital for public
projects without solely relying on government grants or funds.
2. Tax-Exempt Status: Municipal bonds in India often carry tax benefits to attract
investors. Interest income earned from municipal bonds is tax-exempt for retail
investors, making them more attractive in comparison to other fixed-income
instruments subject to taxation.
3. Participation of Institutional Investors: Municipal bonds primarily attract
participation from institutional investors such as banks, insurance companies,
mutual funds, and pension funds. These investors typically have the expertise and
risk appetite to invest in long-term debt instruments.
4. Importance for Urban Development: Municipal bonds play a crucial role in
funding urban development and infrastructure projects, contributing to the growth
and improvement of cities and towns across India. They help bridge the
infrastructure funding gap, stimulate local economic development, and enhance
the overall quality of urban life.

………………………………………………..

Differentiate b/w
Commercial Bills Vs Certificate of Deposits

1. Nature:

• Commercial Bills: Commercial bills are negotiable instruments that represent a promise
to pay a specified amount of money at a future date.
• Certificates of Deposit (CDs): CDs are time deposits issued by banks or financial
institutions, representing a deposit of funds for a specified period at a fixed interest rate.

2. Issuer:

• Commercial Bills: Commercial bills are issued by businesses (drawers) to their creditors
(payees) as a means of short-term financing.
• Certificates of Deposit (CDs): CDs are issued by banks or financial institutions to
individuals or institutional investors.

3. Purpose:

• CB: They are used primarily for trade-related transactions.

• COD: They are primarily used for short-term investment or savings.

4. Maturity:

• Commercial Bills: 30, 60, 90 days

• Certificates of Deposit (CDs): 7 days to 1 year

5. Marketability:

• Commercial Bills: Publicly traded.

• Certificates of Deposit (CDs): Not publicly traded.

6. Discounting:

• Commercial Bills: Commercial bills can be discounted with banks or financial

institutions, where the holder can receive immediate cash by selling the bill at a
discounted price.
• Certificates of Deposit (CDs): No discounting

…………………………………………………….

▪ Merchant Bank: role and types,

 • Merchant banks are financial institutions that specialize in providing a range of financial
services to their clients, primarily businesses and high-net-worth individuals. Merchant
banks typically do not accept deposits from the general public, unlike traditional
commercial banks.

• Role

1. Capital Raising: Merchant banks help companies raise capital by underwriting

securities, such as stocks, bonds, and other financial instruments.
2. Investment Banking: Merchant banks offer investment banking services, such as
merger and acquisition advisory, corporate restructuring, and private equity
investment.
3. Structured Finance: Merchant banks provide structured finance solutions to their
clients, including project financing, asset-based financing, and securitization.
4. Risk Management: Merchant banks help their clients manage financial risks by
offering hedging solutions, such as interest rate swaps, foreign exchange
derivatives, and other risk management instruments.
5. Advisory Services: Merchant banks offer financial advisory services to their
clients, including financial planning, investment management, and estate
planning.
6. Asset Management: Merchant banks also provide asset management services,
including portfolio management, wealth management, and asset allocation.
7. Trading: Merchant banks engage in trading activities, such as securities trading,
foreign exchange trading, and other financial trading activities.

• Types:

1. Investment Merchant Banks: These banks specialize in providing investment banking

services, such as underwriting, corporate finance, mergers and acquisitions, and
restructuring.
2. Trading Merchant Banks: These banks engage in trading activities, such as securities
trading, foreign exchange trading, and other financial trading activities.
3. Private Equity Merchant Banks: These banks focus on providing private equity
investments and related advisory services to their clients.
4. Asset Management Merchant Banks: These banks offer asset management services,
including portfolio management, wealth management, and asset allocation.
5. Universal Merchant Banks: These banks offer a broad range of financial services,
including investment banking, commercial banking, trading, asset management, and other
financial services.

………………………………………………………..
 o Q1 a 2022

Risk Management in Banks,

• → Explain types of risks: market risk, interest risk, liquidity risk, credit risk, operational
risk

• → CAMELS Rating system by RBI

• → Basel Norms: Capital Adequacy Ratio, Supervisory Review, Market Discipline,

Liquidity Coverage Ration, NSF Ratio, Capital Buffers,

…………………………………………………………

………………………………………………………….

Concept and relevance of basel norms

o Basel Norms,
 • Basel norms refer to a set of international banking regulations that aim to ensure the
stability and integrity of the global financial system.

• It is the set of the agreement by the Basel committee of Banking Supervision.

• There are three main versions of Basel norms: Basel I, Basel II, and Basel III.

Basel I:
•

Basel I was introduced in 1988 and is the first set of international banking regulations.

3 main components of the Basel I framework:

→ constituents of capital,
→ the risk weighting system,
→ target ratio.

The central focus of this framework was credit risk and especially, country transfer risk.

Basel I prescribed two tiers of capital for the banks:

• Tier I capital which can absorb losses without a bank being required to cease trading, and
• Tier II capital which can absorb losses in the event of a winding-up.

At least 50 percent of a bank’s capital base was to consist of core elements and supplementary
capital was allowed not to be more than 100 per cent of the core capital.
A bank must hold equity capital at least 8 percent of its assets when multiplied by appropriate
risk weights.

Deficiencies in Basel I capital adequacy norms

Capital adequacy norms of Basel 1 were criticized as several deficiencies surfaced. These
deficiencies were:

o It recommended a ‘one size-fits-all’ approach that did not adequately differentiate

between assets that have different risk levels. This standard encouraged capital
arbitrage through securitization and off-balance sheet exposures.
 o It assumed that the aggregate risk of a bank was equal to the sum of its individual
risks. It failed to take into consideration diversification of a bank’s credit risk
portfolio in the computation of capital ratios. Diversification through the pooling
of risks could significantly reduce the overall portfolio risk of a bank.
o These baseline capital adequacy norms were found to be inadequate as they
almost entirely addressed credit risk and did not explicitly address all the risks
faced by banks such as liquidity risk, and operational risks.
o Many large banks in advanced countries developed advanced risk measurement
approaches to estimate the amount of capital required to support risks. Thus, the
Basel I framework was found to be redundant in its approach.

Basel II:
→ Basel II was introduced in 2004 as an update to Basel I. It is more risk-sensitive than Basel I,
and takes into account a wider range of risks that banks face. Basel II also introduced three
pillars of regulation:

Pillar 1: Minimum Capital Requirements

o Minimum capital requirements, similar to Basel I, but with more focus on risk
sensitivity. Banks are required to hold capital proportional to the risks they take
on. (Capital Adequacy Ratio)

• Capital Adequacy:

▪ The new framework maintained both the current definition of capital and
the minimum requirement of 8 percent of capital to risk-weighted assets.
▪ Commercial banks are required to compute individual capital adequacy for
three categories of risks: credit risk, market risk, and operational risk.

• Capital Adequacy Norms

▪ Capital adequacy ratio is a measure of the amount of a bank’s capital

expressed as a percentage of its risk-weighted credit exposures.
▪ RBI stipulates a capital adequacy ratio of 9 per cent for all banks.

Pillar 2 : Supervisory Review

▪ Requires banks to have a formal risk management process in place, and

for supervisors to regularly review and assess the bank's risk management
process.
 ▪ The two important components of Pillar 2 are internal capital adequacy
assessment process (ICAAP) and supervisory review and evaluation
process (SREP).

Pillar 3: Market Discipline

▪ Requires banks to disclose certain information about their capital, risk

management, and risk exposure to the public.
▪ The RBI has set out disclosure standards for banks. Banks are required to
ensure that there are no qualifications by the auditors in their financial
statements for non-compliance with any of the accounting standards.
▪ Banks are now required to disclose maturity pattern of deposits,
borrowings, investments, advances, foreign currency assets and liabilities,
movements in NPAs, lending to sensitive sectors, total advances against
shares, total investments made in equity shares, convertible debentures
and equity oriented mutual funds, and movement of provisions held
towards depreciation of investment.
▪ Banks with capital funds of ₹100 crore or more are required to make
interim disclosures on the quantitative aspects, on a stand alone basis, on
their respective websites at end-September each year.

Deficiencies in Basel II norms

▪ Basel II was pro-cyclical; in times, when banks were doing well, it did not
impose additional capital requirements on banks. On the other hand, in
stressed times, when banks required additional capital, Basel II required
banks to bring capital. The failure to bring in additional capital forced
major international banks into a vicious cycle of

• deleveraging, thereby leading global financial markets and economies around the world
into recession.

▪ Most of the assets of the banks were trading book exposures such as
securitized bonds, derivative products, and other toxic assets which could
not be liquidated in the times of crisis.
▪ Banks were highly levered and there was no regulation for limiting
leverage.
▪ Basel II failed to address liquidity risk as part of capital regulation. which
cascaded into solvency risk.
▪ Basel II focused more on individual financial institutions and ignored the
systemic risk arising from the interconnectedness across institutions and
markets, which led the crisis to spread to several financial markets.
Basel III:
Basel III was introduced in response to the 2008 global financial crisis.

Key measures include:

Minimum Capital Requirements Under Basel III

▪ Banks have two main silos of capital that are qualitatively different from
one another. Tier 1 refers to a bank’s core capital, equity, and the
disclosed reserves that appear on the bank’s financial statements. If a bank
experiences significant losses, Tier 1 capital provides a cushion that can
allow it to weather stress and maintain a continuity of operations.
▪ By contrast, Tier 2 refers to a bank’s supplementary capital, such as
undisclosed reserves and unsecured subordinated debt instruments.
▪ Tier 1 capital is more liquid and considered more secure than Tier 2
capital.
▪ A bank’s total capital is calculated by adding both tiers together. Under
Basel III, the minimum total capital ratio that a bank must maintain is 8%
of its risk-weighted assets (RWAs), with a minimum Tier 1 capital ratio of
6%. The rest can be Tier 2.
▪ While Basel II also imposed a minimum total capital ratio of 8% on banks,
Basel III increased the portion of that capital that must be in the form of
Tier 1 assets, from 4% to 6%. Basel III also eliminated an even riskier tier
of capital, Tier 3, from the calculation.

Capital Buffers for Tough Times

▪ Basel III introduced new rules requiring that banks maintain additional
reserves known as countercyclical capital buffers—essentially a rainy day
fund for banks.
▪ These buffers, which may range from 0% to 2.5% of a bank’s RWAs, can
be imposed on banks during periods of economic expansion.
▪ That way, they should have more capital at the ready during times of
economic contraction, such as a recession, when they face greater
potential losses.
▪ So, considering both the minimum capital and buffer requirements, a bank
could be required to maintain reserves of up to 10.5%. Countercyclical
capital buffers must also consist entirely of Tier 1 assets.

Leverage and Liquidity Measures

 ▪ Basel III likewise introduced new leverage and liquidity requirements
aimed at safeguarding against excessive and risky lending, while ensuring
that banks have sufficient liquidity during periods of financial stress. In
particular, it set a leverage ratio for so-called “global systemically
important banks.” The ratio is computed as Tier 1 capital divided by the
bank’s total assets, with a minimum ratio requirement of 3%.

▪ In addition, Basel III established several rules related to liquidity. One, the
liquidity coverage ratio, requires that banks hold a “sufficient reserve of
high-quality liquid assets (HQLA) to allow them to survive a period of
significant liquidity stress lasting 30 calendar days.” HQLA refers to
assets that can be converted into cash quickly, with no significant loss of
value.

▪ Required to maintain NSF (Net Stable Funding Ratio). A bank’s NSF ratio
must be at least 100%. The goal of this rule is to create “incentives for
banks to fund their activities with more stable sources of funding on an
ongoing basis” rather than load up their balance sheets with “relatively
cheap and abundant short-term wholesale funding.”

Challenges for Indian banks

Complying with BASEL III norms is not an easy task for India’s banks, which have to increase
capital, liquidity and also reduce leverage. This could affect profit margins for Indian banks.
Plus, when banks keep aside more money as capital or liquidity, it reduces their capacity to lend
money. Loans are the biggest source of profits from banks. Plus, India banks have to meet both
LCR as well as the RBI’s Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) norms.
This means more money would have to be set aside, further stressing balance sheets.

Relevance of Basel Norms:

→ Maintaining minimum capital requirements (capital adeuqacy ratio) for cushioning losses in
times of distress.
→ Maintaining liquidity requirements: Net Stable Fuding Ratio and Liquidity Coverage Ratio
→ Market Discipline: disclose everything
→ Supervision
→ Calculation of market and credit risk
→ Adapting to changing conditions
→ Common framework globally
 o …………………………………………………………………………………………

CONCEPT OF DEMUTULISATION

International Stock Exchanges,

• The growth of global stock markets outside US & Europe is a key reason that the number
of public firms continues to grow. The US still has the largest exchange in the world, but
many of the largest exchanges now reside in Asia, which continue to grow influence on
the world stage. NYSE, TSE (Tokyo Stock Exchange)

o Demutualization of exchanges,

• All the stock exchanges in India (except NSE & OTCEI - Over the Counter Exchange of
India) were broker-owned and controlled. This led to a conflict where the interests of the
broker were preserved over those of the investors. Instances of price rigging, recurring
payment crisis, and power abuse by broker was discovered.

o Demutualization is the process by which any member-owned organization can

become a shareholder-owned company. Such a company could be either listed on
a stock exchange or be closely held by its shareholders.
o Through this process, a stock exchange becomes a corporate entity, changing
from a non-profit making company to a profit and tax (paying) company.
o Demutualization separate the ownership and control of stock exchange from the
trading rights of its members. This reduces the conflict of interest between the
exchange and the brokers and the chances of the brokers using the stock exchange
for personal gains.
o With demutualization, stock exchanges have access to more funds for investment
in technology, merger/acquisition or strategic alliance with other exchanges.
o This process is similar to a company going public where owners are given equity
shares. The process seeks to give majority control (51%) to investors who do not
have a trading right, to allow better regulation of exchange.
o Once listed as a public company, the exchange will be governed by corporate-
governance codes to ensure transparency.

Process of Demutualization

1. Feasibility study: seeing market conditions, regulatory environement, benefits, cost and
implications of this process
2. Frame and Draft a demutualization plan: valuation of memebrs rights, how shares will be
distributed amongst members, structure, operations, governance carry out?
3. Regulatory approval: regulatory body check within guidelines issued.
 4. Member approval: do they approve? certain minimum no. of votes required to be
approved.
5. Valuation and distribution of shares: how much members are going to get for their rights
6. Transition and Conversion: change in bylaws, legal, operations structure
7. Listing and trading of shares: list shares on own exchanges or others
8. Post demutualization governance and operations: transparency

……………………………………………

o NPA, (Non Performing Assets)

The Reserve Bank of India (RBI) defines NPAs as a loan or advance for which the principal or
interest payment remains overdue for a period of 90 days or more.

Measures to manage the problem of NPAs in India by RBI:

In 2015, the RBI introduced the Asset Quality Review (AQR) to improve the transparency of
banks' balance sheets and identify potential NPAs. The AQR required banks to classify stressed
assets as NPAs and make provisions for them accordingly.
Moreover, the RBI has also implemented the Insolvency and Bankruptcy Code (IBC) to address
the issue of stressed assets and NPAs in the banking system. IBC protects the rights of the
creditors.
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Rolling Settlement

o Settlement mechanism at BSE & NSE.

• → Compulsory Rolling Settlement Segment (CRS): With effect from December 31,
2001, trading in all securities takes place in one market segment, viz., Compulsory
Rolling Settlement Segment (CRS).

• → A T+2 settlement cycle means that the final settlement of transactions done on T, i.e.,
trade day by exchange of securities between the buyers and sellers respectively takes
place on second business day (excluding Saturdays, Sundays, bank and Exchange trading
holidays) after the trade day.

• → All transactions in all groups of securities (even ‘G’) in the Equity segment and Fixed
Income

• securities listed on BSE are required to be settled on T+2 basis.

• → "Z" group or "T" group, are settled only on a gross basis and the facility of netting of
buy and sell transactions in such securities is not available.
 • → Trade Confirmation: Once a trade is executed, both the buyer and the seller receive
trade confirmation notes that provide details of the trade, including the quantity, price,
and settlement date. These confirmations help ensure accuracy and transparency in the
settlement process.

• → Benefits: Enhanced liquidity, quicker settlement cycles, reduced counterparty risk, and
improved market efficiency. It allows for timely and efficient clearing and settlement of
trades, ensuring smooth and transparent functioning of the equity market.

………………………………………………..

Insurance Regulatory and Development Authority of India

(IRDAI)
• Insurance Regulatory and Development Authority of India (IRDAI), is a statutory body
formed under an Act of Parliament, i.e., Insurance Regulatory and Development
Authority Act, 1999 (IRDA Act, 1999) for overall supervision and development of the
Insurance sector in India.

Objectives of IRDA

• → To protect the interest of and secure fair treatment to policyholders .

• → To bring about speedy and orderly growth of the insurance industry (including annuity
and superannuation payments), for the benefit of the common man, and to provide long
term funds for accelerating growth of the economy;

• → To ensure speedy settlement of genuine claims, to prevent insurance frauds and other
malpractices and put in place effective grievance redressal machinery.

Structure of the Insurance Regulatory and Development Authority or IRDA

The Insurance Regulatory and Development Authority is a ten member body that consists of a
chairman, five full time and four part time members who have been appointed by the government
of India.

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 ……………………………………

2023 question paper

▪ Retail banking

• Retail banking refers to the division of a bank that deals directly with retail customers.
Also known as consumer banking or personal banking, retail banking is the visible face
of banking to the general public, with bank branches located in abundance in most major
cities.

Some of the retail banking products are:

o Bank accounts like checking/demand accounts (come with a debit card for
making purchases and the ability to pay bills online), saving accounts and
retirement accounts.
 o Money Market accounts pay marginally high, with a few limitations on how often
one can spend the money
o Certificate of Deposits (CD) pay more than savings account, but money must be
left untouched for several months to avoid early withdrawal penalties
o Home Loans to buy home, second mortgages to allow borrowers to refinance
existing loans, Auto Loans, unsecured personal loans (no collateral), lines of
credit (credit cards) allow borrowers to spend and repay repeatedly without
applying for new loans
o Safe deposit boxes
o Net-Banking facility via RTGS (Real Time Gross Settlement) & NEFT (National
Electronic Funds Transfer)

o corporate banking products.

• Corporate banking, also known as business banking, refers to the aspect of banking that
deals with corporate customers and provide them loans for growth. Corporate banking is
a key profit centre for most banks; however, as the biggest originator of customer loans,
it is also the source of regular losses due to bad loans. Several new types of products have
been introduced in the corporate banking sector as listed below:

o Industrial Loans: Providing loans to large industrial corporations. Since mega

corps can obtain funds directly from the market, they can avoid the intermediary
costs (of the banks). The primary business of banks is declining, to combat this
the banks offer debt market advisory, which is a major product sold to corps.
o Project Finance: Bankers finance the project as an individual entity. The parent
company sponsoring the project has limited liability in case of a bad loan.
o Syndicated Loans: Banks can combine to offer huge syndicated loans to
corporations because the debt requirements may be so huge that an individual
bank can’t fulfil them. There is a lead financier bank who is entitled to a special
fee for coordinating with other banks.
o Leasing: A form of off-balance sheet financing, where the company has control
over the leased asset without leveraging the balance sheet of the given
corporation. Leases are signed by companies for majorly acquiring fixed assets.
o Foreign Trade Financing: Rampant foreign trade establishes its need. Banks
provide letters of credit (letter issued by one bank to another to serve as a
payment guaranteed to specific person), export financing and other services to
help MNC’s conduct efficient foreign trade.
…………………………….

Credit rating system for banks explain camels

…………………………………………

▪ Credit Rating Agencies :

▪ Role and mechanism,

• Credit rating agencies (CRAs) are companies that assess the creditworthiness of
individuals, corporations, and governments by assigning credit ratings to their debt
instruments.

• Role of Credit Rating agencies

1. Creditworthiness assessment: Credit rating agencies (CRAs) assess the

creditworthiness of borrowers, such as individuals, corporations, and
governments.
2. Credit rating assignment: The primary function of CRAs is to assign credit ratings
to debt instruments based on the borrower's creditworthiness.
3. Representation of creditworthiness: Credit ratings are a letter or alphanumeric
code that represents the creditworthiness of the borrower and the likelihood of
default.
 4. Investment decision support: The ratings provided by CRAs help investors make
informed investment decisions by providing them with an independent assessment
of the credit risk associated with a particular debt instrument.
5. Ongoing monitoring: CRAs continue to monitor the borrower's financial
condition and may revise the credit rating if there are any material changes in the
borrower's financial situation.

Mechanism of Credit Rating Agencies

1. Data Collection: The first step is to collect data on the borrower's financial condition,
including their financial statements, management discussions, and other relevant
information.
2. Analysis: CRAs then analyze the data to assess the borrower's creditworthiness, including
their ability to meet their debt obligations and the likelihood of default.
3. Rating Assignment: Based on their analysis, CRAs assign a credit rating to the borrower's
debt instrument, which represents the creditworthiness of the borrower and the likelihood
of default.
4. Credit Rating Publication: The credit rating is then published by the CRA, which makes
it available to investors and other market participants.
5. Ongoing Monitoring: CRAs continue to monitor the borrower's financial condition and
may revise the credit rating if there are any material changes in the borrower's financial
situation.
6. Transparency and Disclosure: CRAs are expected to maintain transparency and
disclosure of their rating methodologies, data sources, and rating criteria, to ensure that
their ratings are reliable and trustworthy.

………………………………………………………………………..

▪ Venture Capital Funds concept, stages of investment , exit options;

Venture Capital refers to an equity or equity related investment in growth oriented small or
medium business. VC firms invest in these early-stage companies in exchange for equity or an
ownership stake and take on the risk of financing risky start-ups in the hope that some of them
will boom. VC provide strategic advice to the firm’s executives on its business model. VC have
an interest in generating a return through an exit event such as an IPO or merger/acquisition.
Stages: VC Financing can be broadly classified into the following 6 stages:

1. Seed Capital: Investment towards product development, market research, building a

team, developing B-Plan. (Serious risk, Provided by angel investors)
2. Startup Financing: New activity launched. Funding for marketing and product
development.
 3. Early Stage Financing: Capital provided to initiate commercial manufacturing and sales
after completion of the initial development stage.
4. Expansion Financing: Finance provided to the expansion or growth of the company say
increased production capacity.
5. Replacement Financing: Financing for the purchase of the existing shares from the
entrepreneurs. (Old VC exit and new investor come in prior to IPO)
6. Turnaround Financing: Financing to enterprise that has become unprofitable after
launching commercial production.

Methods/Instruments: VC Financing can be done via the methods described below:

1. Equity Financing: A venture in its initial stage is not able to give timely returns to its
investor, for which equity financing proves beneficial. (Equity for investor is not more
than 49%, thereby ultimate power rests with entrepreneur)
2. Conditional Loan: The ones that do not carry interest and are repayable to the lender in
the form of royalty.
3. Participating Debentures: The interest on participating debentures is payable at three
rates: Nil at Startup phase, Low Rate – Initial operation phase, High Rate – After a
particular level of operations.
4. Convertible Loans: The loans which are convertible into equity when interest on the loan
is not paid within the stipulated period.

Investment Nurturing: It is a process by which VC companies continue to involve themselves in

their investments. They provide continued guidance and support to optimize the benefits of
investment. Build a joint relationship to tackle operational problems of the business. The style of
nurturing can vary depending on the specialization of VC company, stage of investment,
financing model etc.
There are three main kinds:

1. Hands-On: Continuous and constant involvement in operations by representation on the

board of directors. This style is essential in early stage of the project. Guidance is
provided on business planning, technology development, financial planning, marketing
strategy and so on.
2. Hands-Off: VC do not actively participate in formulating strategies, in spite of the right
to do so. The style is apt in syndicated venture financing where angels back a syndicate
led by a notable angel investor. It can also be apt when the initial plan of venture is over
and business is running smoothly.
3. Hand-holding Nurturing: VC Company takes part in the management only when
approached by the units. They provide either in-house assistance or outside expert
guidance.

Evaluating a VC Investment
 1. Fundamental Analysis: Involves analysis various parameters of the company such as its
history, management quality, products, market size, manufacturing, risks etc.
2. Financial Analysis: Evaluating the growth potential of the earnings, future expected cash
flows, expected value at the time of divestment, time lag b/w investment and return.
3. Portfolio Analysis: Portfolio of a VC can be evaluated on following grounds:

• Size of investment: Amount of money per investment

• Stage of Development: Some may be in startup while others may be in development
• Geographic Location: International diversity holds importance for a local fund
• Industry sectors – Diversify portfolio to offset slow growth investment

Exits available: The last stage of venture capital investment is to make the exit plan based on the
nature of investment, extent and type of financial stake etc. The exit plan is made to make
minimal losses and maximum profits. The venture capitalist may exit through:

• IPO Method: When an IPO is issued, the VC sells its take. IPO facilitates liquidity of
investment and commands higher price of securities.
• Sale of Share: Sale of share is undertaken by VC to entrepreneurs who have promoted the
venture.
• Puts & Calls: VC company enters into formal exit agreement with entrepreneur at a price
based on a pre-determined formula. (Put is the right to sell, Call is the right of the
entrepreneur to buy)
• Trade Sales: Entire investee company is sold to another company at an agreed price. This
takes place through Management Buy-Out which is the acquisition of a company from
existing owners by a team of existing management/employees. Management Buy-in
involves bringing in a team for, outside.

Disadvantages

1. Forced Management Changes: There might be unwanted additional management

intervention on part of the VC, when the owner does not want any.
2. Loss of Equity Stake: VC give large sums of money at low risks; it then becomes obvious
that large equity would be foregone in return.
3. Decision Making Ability: Owners may have to consult the VC before making crucial
decisions in capital making which can constrain autonomy.
4. Delay in Funding: All fund may not be disseminated at the same time, and milestone may
have to be achieved, which may put additional pressure on them.

Process of venture investment

•Deal Origination: One of the most common sources of such origination is referral system where
deals are referred to the venture capitalist by their business partners, parent organisations, friends
etc. •Screening: venture capitalist scrutinizes all the projects in which he could invest. The projects
are categorized under certain criterion such as market scope, technology or product, size of
investment, geographical location, stage of financing etc. For the process of screening the
entrepreneurs are asked to either provide a brief profile of their venture or invited for face-to-face
discussion for seeking certain clarifications. •Evaluation: Of project capacity + capacity of the
entrepreneurs to meet such claims. Certain qualities in the entrepreneur such as entrepreneurial
skills, technical competence, manufacturing and marketing abilities and experience are put into
consideration during evaluation. •Negotiation: the terms and conditions are formulated. Both
parties’demands are settled. Negotiated on amount of investment, percentage of profit held by
both the parties, rights of the venture capitalist and entrepreneur etc. •Post Investment Activity:
Once the deal is finalised, the venture capitalist becomes a part of the venture and takes up certain
rights and duties. They participate in the enterprise by a representation in the Board of Directors
and ensure that the enterprise is acting as per the plan. •Exit plan: (i) going public, (ii) sale of shares
to entrepreneurs/employees, (iii) trade sales/sale to another company, (iv) selling to a new investor
and (v) iquidation/receivership.

…………………………………………………………………………

o Factors influencing the movement of stock markets,

• Factors influencing the movement of stock markets

1. Economic Growth: Higher economic growth, better profitability of firms due to higher
demand for goods.
2. Interest Rates: Lower interest rates boost economic growth by increasing demand, and
also make shares relatively more attractive than saving money in banks.
3. Stability: Stock markets dislike shocks, and tend to fall on news of terror attacks or oil
price spikes.
4. P/E ratio: P/E ratio can guide the long-term performance of shares.
5. Confidence & Expectations: Optimistic news results in investors buying more shares, and
will sell in case of pessimistic news. Investors always try to predict future. If they feel the
worst is over, then the stock market can start rising again.
6. Bandwagon effect: Tendency of market to over-react to certain events. When prices fall,
herd mentality can result in people selling stocks rapidly.

o indicators of maturity of stock markets,

• Market Indicators: Market indicators are quantitative in nature and seek to interpret stock or
financial index data in an attempt to forecast market moves. Market indicators are a subset of
technical indicators and are typically comprised of formulas and ratios. They aid investors'
investment / trading decisions.

• The two most common types of market indicators are:

• Market Breadth indicators compare the number of stocks moving in the same direction as a
larger trend. For example, the Advance-Decline Line looks at the number of advancing stocks
versus the number of declining stocks.
 • Market Sentiment indicators compare price and volume to determine whether investors are
bullish or bearish on the overall market. For example, the Put Call Ratio looks at the number of
put options versus call options during a given period.

• New Highs-New Lows - The ratio of new highs to new lows at any given point in time. When
there are many new highs, it's a sign that the market may be getting frothy (market bubble),
while many new lows suggest that a market may be bottoming (reaching low price) out.

• Moving Averages: Many market indicators look at the percentage of stocks above or below key
moving averages, such as the 50- and 200-day moving averages.

…………………………………………………………………………………….

• What is Government Security (G-Sec)?

• A Government Security (G-Sec) is a tradable instrument issued by the Central

Government or the State Governments. It acknowledges the Government’s debt
obligation.

• Such securities are short term (usually called treasury bills, with original maturities of
less than one year) or long term (usually called Government bonds or dated securities
with original maturity of one year or more).

• In India, the Central Government issues both, treasury bills and bonds or dated securities
while the State Governments issue only bonds or dated securities, which are called the
State Development Loans (SDLs).

• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged
instruments.

Issuance of G-Secs
o G-Secs are issued through auctions conducted by RBI.
o Auctions are conducted on the electronic platform called the E-Kuber, the Core
Banking Solution (CBS) platform of RBI.
 o Commercial banks, scheduled UCBs, Primary Dealers, insurance companies and
provident funds, who maintain funds account (current account) and securities
accounts (Subsidiary General Ledger (SGL) account) with RBI, are members of
this electronic platform.
o All members of E-Kuber can place their bids in the auction through this electronic
platform.

• Why should one invest in G-Secs?

• Holding of cash in excess of the day-to-day needs (idle funds) does not give any return.
Investment in gold has attendant problems in regard to appraising its purity, valuation,
warehousing and safe custody, etc. In comparison, investing in G-Secs has the following
advantages:

• → Besides providing a return in the form of coupons (interest), G-Secs offer the
maximum safety as they carry the Sovereign’s commitment for payment of interest and
repayment of principal.

• → They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the
need for safekeeping. They can also be held in physical form.

• → G-Secs are available in a wide range of maturities from 91 days to as long as 40 years
to suit the duration of varied liability structure of various institutions.

• → G-Secs can be sold easily in the secondary market to meet cash requirements.

• → G-Secs can also be used as collateral to borrow funds in the repo market.

• → Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds,
UDAY bonds etc) provide attractive yields.

• → The settlement system for trading in G-Secs, which is based on Delivery versus
Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP
mechanism ensures transfer of securities by the seller of securities simultaneously with
transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.

• → G-Sec prices are readily available due to a liquid and active secondary market and a
transparent price dissemination mechanism.
The process of issuing government securities in India involves:

1. **Announcement**: The government announces its borrowing program and

auction details.

2. **Auction Notification**: The RBI issues a detailed auction notification.

3. **Auction Participation**: Investors submit bids; institutional investors

participate in competitive bidding, while smaller investors use non-competitive
bidding.

4. **Auction Process**: The RBI conducts the auction, evaluates bids, and
determines the yield.

5. **Bid Evaluation and Allotment**: Bids are evaluated, and securities are
allotted based on the yield.

6. **Settlement**: Successful bidders settle payments, usually on T+1 or T+2

basis.

7. **Issuance**: Securities are issued in electronic form and credited to investors'

accounts.

8. **Coupon Payments**: For bonds, periodic coupon payments are made until
maturity.

……………………………………………..

▪ Foreign Capital – FDI & FII

• FDI stands for Foreign Direct Investment, which refers to a direct investment made by a
foreign company in a domestic company or a physical investment in the form of a
subsidiary. FDI involves a long-term commitment to the host country and is typically
made to acquire a controlling stake in a company or to establish a new business. FDI is
often accompanied by the transfer of technology, management expertise, and job
creation. Examples of FDI include a foreign company acquiring a stake in a domestic
company, setting up a new factory or office, or establishing a subsidiary in the host
country.

• FII stands for Foreign Institutional Investment, which refers to investments made by
foreign institutions, such as pension funds, mutual funds, and hedge funds, in the
securities markets of a country. FIIs are typically short-term investments that involve
buying and selling stocks, bonds, and other financial instruments. FIIs are often
motivated by the potential for higher returns and are less committed to the host country
 than FDI. Examples of FII include a foreign institutional investor purchasing stocks in a
domestic company, or investing in the government bonds of a country.

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