Class 12 Finance Chapter 2 Money Market And Foreign Exchange Market

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Class 12 Finance Chapter 2 Money Market And Foreign Exchange Market

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Also, you can read the SCERT book online in these sections Solutions by Expert Teachers as per SCERT (CBSE) Book guidelines. Class 12 Banking Solutions These solutions are part of SCERT All Subject Solutions. Here we have given Assam Board/NCERT Class 12 Finance Chapter 2 Money Market And Foreign Exchange Market Solutions for All Subject, You can practice these here.

Money Market And Foreign Exchange Market

Chapter: 2

(A) Very short type Questions Answers:

1. What is financial market?

Ans: A financial Market can be defined as the market in which financial assets are created or transferred. It refers to the institutional arrangements for dealing in financial assets and credit instruments of different types such as currency, cheques, bank deposits, bonds, bills etc.

2. Write the full form OTCEI.

Ans: Over The Counter Exchange of India.

3. When OTCEI was established?

Ans: In 1990.

4. In which year NSE was established?

Ans: In June, 1991.

5. In which year BSE was established?

Ans: In 1875.

6. What is Money Market?

Ans: Money Market may be defined as the centre for dealings in monetary assets mainly of short-term character. It meets the short-term requirements of borrowers and provides liquidity to the lenders.

7. What is Foreign Exchange Market?

Ans: Foreign Exchange Market is an international market. This type of market helps exporters and importers, in converting their currencies into foreign currencies and vice-versa. The market in which international currency trade takes place is called the foreign exchange market.

8. Who are the participants of Foreign Exchange Market?

Ans: (i) Commercial Banks.

(ii) Brokers.

(iii) Central Bank.

(iv) Accepting Houses.

(v) Financial Institutions.

(B) Short type Questions Answers:

1. What is industrial securities market?

Ans: The market for industrial securities is known as industrial securities market. It is an ideal market for corporate securities such as bonds and equities.

2. What is a Commercial paper?

Ans: The commercial paper is unsecured promissory note issued by credit worthy companies with a fixed maturity period which may be between 15 days to 12 months. CPs are generally purchased by banks, insurance companies and mutual funds.

3. What is a Certificate of Deposit (CD)?

Ans: It is a time deposit issued by a bank. It is a document of title to the time deposit and works as bearer certificate. It can be issued for a period ranging from 15 days to 12 months.

4. Mention briefly about the different forms of financial market.


What are the different types of Financial Market? 

Ans: Broadly the financial market can be classified into two categories namely:

(i) Organised Market.

(ii) Unorganised Market.

The Organised market can also be subdivided into:

(i) Money Market.

(ii) Capital Market.

The Unorganised market can also be subdivided into:

(i) Money Lenders.

(ii) Indigenous Bankers, etc.

5. What are the two sectors of Indian Money Market?

Ans: The two sectors of Indian Money Market are:

(i) Organised Sector.

(ii) Unorganised sector.

The organised sector comprises the Reserve Bank of India. State Bank of India Group, commercial banks, Foreign Exchange Banks and other financial institutions.

The unorganised sector consists of Indigenous Bankers and Money Lenders.

6. What are the sub-markets in the money market? 

Ans: The submarkets of Money Market are:

(i) Call Money Market. 

(ii) Collateral Loan Market. 

(iii) Acceptance Market.

(iv) Bill Market.

7. What are the instruments traded in the money market?

Ans: The instruments, which are traded in the money market are:

(i) Call Money. 

(ii) Commercial papers.

(iii) Certificate of Deposits.

(iv) Bills of Exchange. 

(v) Repo Instrument.

8. Name the Institutions operating in the money market.

Ans: Important Institutions operating in the Money Market are: 

(i) Central Banks.

(ii) Commercial Banks. 

(iii) Acceptance Houses.

(iv) Non-Bank Financial Institutions.

9. What is Money Market?

Ans: Money Market refers to the institutional arrangements facilitating borrowers who are in need of short-term funds. In a money market, funds can be borrowed for a short period varying from a day, a week, a month, 3 to 6 months against different types of instruments, such as bills of exchange banker acceptances, etc., called “near money”. So money market is a type of market, which helps or guides the public to invest their surplus fund in industrial concerns and helps people to take loans through banks. According to Crowther, “Money Market is a collective name given to the various firms and institutions that deal with various grades of near money.”

10. Write a short note on Foreign Exchange Market.


What do you mean by Foreign Exchange Market? 

Ans: Foreign Exchange Market is an international market. This type of market helps exporters and importers, in converting their currencies into Foreign currencies and vice-versa. Thus, foreign exchange market is a market in which foreign exchange transactions take place. International transactions involve payments or receipts in currencies other than the home currency to trading countries. The market in which international currency trade takes place is called the foreign exchange market.

Foreign Exchange Market is the organisational framework within which banks, firms, individuals and government buy and sell foreign currencies. The main object of foreign exchange market is to facilitate international trade and investment.

According to Kindle berger, “Foreign Exchange Market is a place where foreign moneys are bought and sold.”

11. What is Indian Money Market?

Ans: The Indian Money Market can be divided into two sectors: 

(a) Organised Sector.

(b) Unorganised Sector.

(a) Organised Sector: The organised sector of the Indian Money Market is well established and better managed. It comprises the Reserve Bank of India, State bank of India Group, Commercial Banks, Foreign Exchange Banks and other financial institutions.

(b) Unorganised Sector: The unorganised sector of Indian Money Market is not under the supervision of the RBI or the government. It contains agencies which have diverse policies, lack of uniformity and consistency in the business activities. This sector lacks scientific organisation, being orthodox in approach, stagnant and ill-organised. This sector comprises of indigenous bankers, money lenders, chit funds etc.

12. Write the Definition of Money Market.

Ans: Reserve Bank of India describes the Money Market as:

“The center for dealings, mainly of a short term character, in monetary assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders”.

According to Crowther: “The money market is the collective name given to the various firms and institutions that deal in the various grades of near money”.

13. What are the Objectives of Money Market? 

Ans: The following are the important objectives of a money market:

(a) To provide a parking place to employ short-term surplus funds.

(b) To provide room for overcoming short-term deficits.

(c) To enable the Central Bank to influence and regulate liquidity in the economy through its intervention in this market.

(d) To provide a reasonable access to users of Short-term funds to meet their requirements quickly, adequately and at reasonable costs.

14. What is the Real Effective Exchange Rate (REER)?

Ans: The Real Effective Exchange Rate (REER) is a measure of a country’s currency value relative to a basket of other currencies, adjusted for inflation. It takes into account the relative prices of goods and services between countries and provides a more comprehensive view of a country’s currency value than the nominal exchange rate. The REER is calculated by adjusting the nominal exchange rate using the country’s inflation rate and the inflation rates of its trading partners. A high REER indicates that a country’s currency is overvalued, while a low REER indicates that it is undervalued.

15. What is Money Market Mutual Fund?

Ans: Money Market Mutual Fund (MMMF) is a separate entity in the form of Trust. It was introduced in April, 1991. It provides an additional short-term avenue for investment and bring money market investment within the reach of individuals. These mutual funds would invest exclusively in money market instruments. It bridges the gap between small individual investors and the money market. It mobilises savings from small investors and invest them in short-term debts.

(C) Long type Questions Answers:

1. Discuss about the institutions participating in the Indian Money Market.

Ans: The principal institutions of money market are briefly discussed below:

(i) Commercial Banks: The commercial banks are the most active money market institutions. These banks use their short-term funds to grant short-term loans to the money market. Commercial banks invest their funds in the discounting of commercial papers, such as bills of exchange and treasury bills. Commercial banks always try to maintain a balance between liquidity and profitability.

(ii) Central Bank: The central bank is the leader of the money market. It is the apex money market institution and plays a vital role in the regulation and development of money market. It acts as the leader of the last resort and meet the liquidity requirements of the market by supplying funds. The central bank, however, does not enter into direct money market transactions. It exercises its control on the working of the market through banking and other financial intermediaries.

(iii) Acceptance Houses: Acceptance Houses are the important institutions of developed money market. The acceptance houses are specialised institutions and are set up for the purpose of accepting and guaranteeing of trade bills. These houses provide assistance without the use of cash by enhancing the value of bills which can be readily discounted in any money market.

(iv) Non-Banking Financial Institutions: The non-banking financial institutions also participate in the money market. These intermediaries resort to money market to employ their short-term surplus funds as well as to meet their short-term requirements of funds.

2. What are the functions of Financial Market?

Ans: The important functions of Financial Market are started below:

(i) It encourages savings and facilitates mobilisation of saving by financial intermediaries.

(ii) It enhances the liquidity of financial assets by providing ready market.

(iii) It helps in the allocation of credit to productive investments and thereby promoters capital formation.

(iv) It provides financial convenience and benefits to the borrowers and lenders of funds.

(v) It caters to the financial requirements of firms, companies, government as well as individuals.

(vi) It assists in the process of balanced economic development of the country through a balanced regional and sectoral allocation of funds.

(vii) It provides scope for prudent portfolio management by institutions as well individuals.

3. State the features of Money Market?

Ans: The salient features of Money Market are as follows:

(i) Flow of short-term funds: The money market brings together the lenders who have surplus funds for short-term and the borrowers who are in need of short-term funds.

(ii) Sub-market: Money Market consists of money sub-market such as interbank call money market, treasury bills market, bills discounting market etc.

(iii) Dealers of money market: Various commercial banks, central bank, non-bank financial institutions etc. provide short-term loans to different traders, manufacturers, government institutions etc.

(iv) Association with big cities: Money market are associated with important places. Almost every big city has a money market, e.g.. London Money Market, New York Money Market etc.

(v) Reasonable access: Money market provides reasonable access to users of short-term funds to meet their requirements on reasonable terms or rates of interest.

(vi) Remittance Facilities: Existence of a convenient and cost-effective remittance facility is a hallmark of a developed money market. Smooth functioning of a developed money market is not possible in the absence of such infrastructure.

(vii) Proper Coordination among Sub-Markets: In order to ensure that the entire money market operates in a cohesive and coordinated manner, is necessary that different sub-markets of a developed money market function inter dependently and not on a stand-alone basis.

4. Discuss briefly about the various sub markets or components of money market?


Write a brief note about the composition of Money Market.


Explain the various money market instruments.

Ans: The money market is not a homogenous market but it is composed of several specialised sub-markets. Each one of which deals in different types of short-term credit.

The following are the important constituents of money market:

(i) Call Money Market: The call money market refers to the market for extremely short period loans, say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower. Bill brokers and dealers in stock exchange usually borrow money for short period from commercial banks. There is no demand of collateral securities against call money. The borrowers are required to pay the loan as and when asked for i.e. at a very short notice.

(ii) Collateral Loan Market: It is another important component of the money market. The market which deals with collateral loans, i.e., loans backed up by collateral securities like stocks, bonds etc. is called collateral Loan Market. The collateral loans are given for a short period generally lasting a few months. In this market, borrowers are generally brokers and dealer in stocks and shares and the lenders are commercial banks. The collateral security is returned to the borrower when the loan is repaid. But if the loan is not repaid, the collateral security may be retained by the lender.

(iii) Acceptance Market: Acceptance Market is also an important component of the money market. It refers to the market for banker’s acceptances involved in trade transactions. This market deals with banker’s acceptances which may be defined as a draft drawn by an individual or a firm upon a bank and accepted by it to pay to the order of a specified person or to the bearer, a certain specified sum of money as a specified date in future. This is commonly used to settle payments in international trade. Banker’s acceptance can be easily discounted in the money called acceptance market.

(iv) Bill Market: The Bill Market refers to the market in which short- term papers or bills are bought and sold. The important short-term papers are commercial bills.

There are two types of commercial bills:

(a) Bills of Exchange. and

(b) Treasury Bills.

(a) Bills of Exchange: Bills of Exchange is written unconditional order which is signed by the drawer (buyer) requiring the drawee (seller) to pay on demand or at a fixed future time, a definite sum of money. The buyer accepts the bill and returns to the seller. The seller may either retain the bill till due date or get it discounted from some banker and get immediate cash. Discounting is the process of exchange of credit so it is known as discount market.

(b) Treasury Bills: On the other hand, treasury bills are government securities for a short period usually of the duration of all days. Such bills are promissory notes of the government to pay a specified sum after a specified period. Such bills are sold by the central bank on behalf of the government.

(v) Commercial Bills: Commercial Bills also known as Trade Bills or Accommodation Bills are the bills drawn by one organisation on another. Commercial Bills are the common instruments of the money market which are used in credit sales and purchases. The maturity period of commercial bills is for short-term, generally of 90 days. However, one can get the commercial bills discounted with the bank before the maturity period. The Trade Bills are negotiable and easily transferable instruments.

(vi) Commercial Paper: An unsecured promissory note issued by private or public sector companies with a fixed maturity period varying from 15 days to one year, is known as a Commercial Paper. It was for the first time introduced in India in 1990. As this instrument is unsecured, it can be issued by companies with creditworthiness and good reputation. The main investors of commercial papers are commercial banks and mutual funds.

(vii) Certificate of Deposits: A time or deposit that can be sold in the secondary market is known as a Certificate of Deposits (C.D.). It can be issued by a bank only and is a bearer certificate or document of title. A Certificate of Deposits is a negotiable and easily transferable instrument. The banks issue the Certificate of Deposits against the deposit kept by the institutions and companies. The time period of a Certificate of Deposits ranges from 91 days to one year. The C.D.’s can be issued to companies, corporations, and individuals during a period of tight liquidity. It is that time when the bank’s deposit growth is slow, but the credit demand is high.

(viii) Repurchase Agreements: Commonly known as Repo, it is a short-term borrowing tool where the issuer availing the funds guarantees to repay (repurchase) it in the future. Repurchase agreements generally involve the trading of government securities. They are subject to market interest rates and are backed by the government.

5. Explain the functions/importance of the Money Market?

Ans: An efficient and developed money market helps the smooth functioning of the financial system in the economy in the following ways:

(i) Financing Trade: The corporate houses and industries also use the money market to raise domestic and financial trade money. The money market helps traders get commercial finance through a bill of exchange at discounted prices than the bill market.

(ii) Development of Trade and Industry: Money market is an important source of financing trade and industry. The money market, through discounting operations and commercial papers, finances the short-term working capital requirements of trade and industry and facilitates the development of industry and trade both-national and international.

(iii) Smooth Functioning of Commercial Banks: The money market provides the commercial banks with facilities for temporarily employing their surplus funds in easily realisable assets. The banks can get back the funds quickly, in times of need, by resorting to the money market. The commercial banks gain immensely by economising their cash balances in hand and at the same time meeting the demand for large withdrawal of their depositors. It also enables the commercial banks to meet their statutory requirements of Cash Reserve Ratio (CRR) and statutory Liquidity Ratio (SLR) by utilising the money market mechanism.

(iv) Development of Capital Market: The short term rates of interest and the conditions that prevail in the money market influence the long-term interest as well as the resource mobilisation in capital market. Hence, the development of capital market depends upon the existence of a developed money market.

(v) Effective Central Bank Control: A developed money market helps the effective functioning of a central bank. It facilitates effective implementation of the monetary policy of a central bank. The central bank, through the money market, pumps new money into the economy in slump (a sudden fall in price) and siphons (convey) it off in boom. The central bank, thus, regulates the flow of money so as to promote economic growth with stability.

(vi) Non-Inflationary Source of Finance to Government: A developed money market helps the Government to raise short-term funds through the treasury bills floated in the market. In the absence of a developed money market, the Government would be forced to print and issue more money or borrow from the central bank. Both ways would lead to an increase in prices and the consequent inflationary trend in the economy.

(vii) Formulation of Suitable Monetary Policy: Conditions prevailing in a money market. Serves as a true indicator of the monetary state of an economy. Hence, it serves as a guide to the Government in formulating and revising the monetary policy then and there depending upon the monetary conditions prevailing in the market.

6. Discuss the defects of Indian money market.


Explain the characteristics/features of Indian Money Market.

Ans: The important characteristics or defects of Indian Money Market are discussed as under:

(i) Existence of unorganised money market: The Indian money market is classified into the two sectors, viz organised and unorganised. The existence of indigenous bankers as unorganised sector of money market is the most important drawback of the Indian money market. It is unorganised because their activities are not controlled and co-ordinated by the RBI.

(ii) Lack of co-ordination: The Indian money market may be characterised as loose and unbalanced because there exists no co ordination between the organised and unorganised.

(iii) Instability and Inelasticity: The instable and inelastic Indian money market acts as a great hindrance to the rapid economic development of the country.

(iv) Divergent lending rates and policies: There is wide divergent not only in the structure of interest rates, but also in the lending policies of the different financial institutions. Thus, lack of homogeneity is one of most important features of Indian Money Market.

(v) Shortage of Funds: The Indian Money Market is characterised by shortage of funds. Demand for loanable funds in the market for exceeds its supply. This insufficiency of funds are mainly due to low savings capacity of the people, inadequate banking facilities, lack of banking habit among the people and lack of diversified investment opportunities.

(vi) Underdeveloped Bill Market: The bill market is also under developed in India. Indian traders resort to hundies, rather than draw bills of exchange. Further, there is lack of standardisation in drawing of bills and hundies in India.

(vii) Inadequate Supply of Instruments: The Indian Money Market lacks sufficient and regular supply of short-term financial instruments of assets such as trade bills, treasury bills etc. Moreover, there is also a shortage in dealers who can function as intermediary between the issuing institutions and the investors.

(viii) Banking Gap: Scientifically run institutions like commercial banks have a largely urban orientation in India. Banking facilities are inadequate in the villages of India.

7. What is government securities or gilt edged securities market?

Ans: A government security is a bond or other type of debt obligation that is issued by a government with a promise of repayment upon the security’s maturity date. Government securities are usually considered low-risk investments because they are backed by the taxing power of a government. In fact, investment in U.S. treasury securities is probably the safest investment that can be made.

Gilt-edged securities are bonds issued by some national governments. The term is of British origin, and then referred to the debt securities issued by the Bank of England, whose paper certificates had a gilt (or gilded) edge. Hence, they are known as gilt-edged securities, or gilts for short.

8. Distinguish between Money Market and Capital Market.

Ans: Distinction between Money Market and Capital Market:

BasisMoney MarketCapital Market
1. MeaningThe market dealing in short-term funds is known as money market.The market dealing in long- term funds is known as capital market.
2. Maturity periodThe instruments of money market are of short duration i.e. for one year or less.The capital market instruments are of long duration i.e. for more than one year.
3. InstrumentsCall money, collateral loans bills of exchange, treasury bills, certificate of Deposit etc. are the instruments of money market.The instruments in the capital market include shares, debentures, bonds, stocks etc.
4. Purpose of LoanThe finance provided by the money market is utilised usually for working capital.On the other hand, finance provided by the capital market is used both for working and fixed capital.
5. ParticipantsOnly the institutional investors operate in the money market.Individual and institutional investors operate in the capital market.
6. LiquidityThe instruments of money market have very high degree of liquidity.The instruments of capital market always take time to convert into cash.
7. Relation with Central BankThe money market is closely and directly related with the central bank.But the capital market is indirectly related with central bank.
8. SafetyInvestments are safe as funds are invested in the instruments issued by commercial banks and highly rated companiesInvestments may not be safe because of uncertainties.

9. State two functions of foreign exchange market?

Ans: Foreign exchange market performs the following three functions:

(a) Transfer Function: It is the primary function of the foreign exchange market. It facilitates the transfer of purchasing power in terms of foreign exchange between the countries that are involved in the transactions. Purchasing power (or buying power) is the number of products and services that one unit of currency can purchase. The function is performed through credit instruments like bills of exchange, bank drafts, and telephonic transfers. Therefore, it involves sending money or foreign currencies from one nation to another to settle their accounts.

(b) Credit Function: It is the primary function of the foreign exchange market. It facilitates the transfer of purchasing power in terms of foreign exchange between the countries that are involved in the transactions. Purchasing power (or buying power) is the number of products and services that one unit of currency can purchase. The function is performed through credit instruments like bills of exchange, bank drafts, and telephonic transfers. Therefore, it involves sending money or foreign currencies from one nation to another to settle their accounts.

(c) Hedging Function: It implies to protection against risk related to fluctuations in the foreign exchange rate. Under this system, buyers and sellers agree to sell and buy goods on a future date at some commonly agreed rate of exchange. The basic purpose behind Hedging Function is to avoid losses that might be caused because of variations in the exchange rate in the future.

10. Explain the importance or role of the money market in India.

Ans: The role of the money market in India can be explained as follows:

(a) Short-term requirements of borrowers: Money market provides access to sources of funds to borrowers in order to meet their short-term requirements at reasonable interest rates.

(b) Liquidity Management: Money market is a dynamic market. It facilitates better management of liquidity and money in the economy by the monetary authorities. This, in turn, leads to economic stability and development of the country.

(c) Portfolio Management: Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of the investors. This enables the investors to hold a portfolio of different financial assets which in turn, helps in minimizing risk and maximizing returns.

(d) Equilibrating mechanism: Through the rational allocation of resources and mobilization of savings into investment channels, the money market helps to establish equilibrium between the demand for and supply of short-term funds.

(e) Economizes the use of cash: Money market deals with various financial instruments that are close substitutes of money and not actual money. Thus, it economizes the use of cash.

(f) Implementation of monetary policy: Monetary policy is implemented by the central bank. It aims at managing the quantity of money to meet the requirements of different sectors and to increase the pace of economic growth. A well developed money market ensures the successful implementation of the monetary policy. It also guides the central bank in developing an appropriate interest policy.

(g) Financial requirements of the government: Money market helps the government to fulfill its short-term financial requirements on the basis of Treasury Bills (T-bills).

11. Discuss the Characteristic features of a developed Money Market.

Ans: The developed money market is a well organised market which has the following main features:

(i) A Central Bank: A developed money market has central banks at the top which is the most powerful authority in monetary and banking matter. I controls, regulates and guides the entire money market. It provides liquidity to the money market, as it is the lender of the last resort to the various constituents of the money market.

(ii) Organised Banking System: An organised and integrated banking system is the second feature of a developed money market. In fact, it is the pivot around which the whole money market revolves. It is the commercial banks which supply short-term loans, and discount bills of exchange. They form an important link between the borrowers, brokers, discount houses and acceptance houses and the central bank in the money market.

(iii) Existence of Large Near – Money Assets: A developed money market has a large number of near-money assets of various types such a bills of exchange, promissory notes, treasury bills, securities, bonds, etc. The larger the number of near-money assets, the more developed is the money market.

(iv) Integrated Interest-Rate Structure: Another important characteristic of a developed money market is that it has an integrated interest-rate structure. The interest rates prevailing in the various sub- markets are integrated to each other. A change in the bank rate leads to proportional changes in the interest rate prevailing in the sub-markets.

(v) Adequate Financial Resources: A developed money market has easy access to financial sources from both within and outside the country. In fact, such a market attracts adequate funds from both sources, as is the case with the London Money Market.

(vi) Remittance Facilities: A developed money market provides cash and cheap emittance facilities for transferring funds from one market to the other. The London Money Market provides such remittance facilities throughout the world.

(vii) Demand And Supply of Funds: There should be a large demand and supply of short-term funds. It presupposes the existence of a large domestic and foreign trade. Besides, it should have adequate amount of liquidity in the form of large amounts maturing within a short period.

12. Write the Similarities between Money market and Capital market.

Ans: The key components of the international market are the money market and the capital market. Both the money and capital markets facilitate participants to buy debt securities. Debt securities are financial products where the borrower promises the lender to pay back the debi amount. Other types of money markets and securities are also exchanged in the capital market. A high amount of rupees is exchanged daily in both types of markets. The expanded activities of the government or any business activity is paid for through lending money from both types of markets. Even the capital needed for operations of government or business is sometimes borrowed from both types of markets depending on the time. Both the markets do not exchange stocks and bonds off-line or hand to hand. These usually exchange money through some particular online platforms. Furthermore, both markets are largely intangible. Most of the trading occurs through computerized trading platforms, not in physical market places or exchanges. While the floor of the New York Stock Exchange is the icon of the capital market, the number of traders on its floor decrease every year and the CEO of NASDAQ has called a relic.

13. Explain the Structure of Indian money market.

Ans: India is a vast country and rich in agricultural products for many years British’s ruled over India and gave benefits to their home country i.e., England a number of decades have passed since independence but still, the Indian government is not able to provide banking facilities in every corner of the country. that’& why the position of regional balance has not been achieved and India still having its area into three divisions such as a rural, urban and semi-urban. Keeping in mind about above views, the Indian money market is also classified into two-part:

(a) Unorganised Sector: The unorganized money market means the market which is not governed by any governing body. It operates individually and independently. The major players in the unorganized money market include money lenders, Indigenous bankers, merchants, landlords Meghan’s, chukars, nidhis, chit funds, etc.

(b) Organised sector: On the other hand, an organized market is a government by the reserve bank of India. This market has overcome all the defects of an unorganized money market and it is well established scientifically managed market. It comprises of:

(i) The Reserve Bank of India.

(ii) The commercial bank i.e., public, private, and foreign banks.

(iii) The exchange i.e., export, import bank.

(iv) The cooperative banks.

(v) The agriculture bank i.e., NABARD.

(vi) The non-banking financial institutions such as IDBI, ICICI, UTI, LIC, P.T.O, etc.

14. Explain the Defects of the Indian money market.

Ans: Defects of the Indian money market:

(a) Shortages of Funds: Generally, there is shortage of funds in Indian Money Market on account of various factors like inadequate banking facilities, low savings, lack of banking habits, existence of parallel economy, etc. have also been responsible for the paucity of funds in the money market.

(b) Existence of Unorganised Money Market: This is one of the major defects of Indian Money Market. It does distinguish between short term and long term finance, and also between the purposes of finance. Since it is outside the control and supervision of RBI. It limits the RBI’s control over money market.

(c) Delays in technological up-gradation: Use of advanced technology is a pre requisite for the development and smooth functioning of financial markets. Delays in up-gradation of technology hampers the working of the money market.

(d) Absence of Well Organized Banking Sector: Branch expansion was very slow before bank nationalization in 1969. Even now the banks are largely concentrated in large towns and small cities. There is lack of movement of funds. Indian banking system is not yet a well organized sector.

(e) No Uniformity in the rates of interest: There exists too many rates of interest in the Indian Money Market such as the borrowing rate of government, deposits and lending rates of co-operatives and commercial banks, lending rates of financial institutions, etc. This is due to lack of mobility of funds from one section of the money market to another.

(f) Seasonal fluctuations: The seasonal stringency of money and high rate of interest during the busy season (November to June) is striking feature of Indian Money market. There are wide fluctuation in the interest rates from one season to another. Money Market add money into the money market during the busy season and withdraw funds during the slack seasons.

15. Explain the Measures to improve the Indian money market.

Ans: In a view of the various defects in the Indian money market, the following suggestions have been made for its proper development.

(i) The activities of the indigenous bank should be brought under the effective control of the reserve bank of India.

(ii) Hundies used in the money market should be standardized and written in a uniform manner in order to develop the all-India money market.

(iii) Banking facilities should be expanded especially in the market unbanked and neglected areas.

(iv) Discounting and rediscounting facilities should be expanded in a big way to develop the bill market in the country.

(v) For raising the efficiency of the money market, the number of clearinghouses in the country should be increased and their work improved.

(vi) Adequate and less costly remittance facilities should be provided to the businessman to increase the mobility of capital.

(vii) Variations in the interest rates should be reduced.

6. Who are the lenders and borrowers of Indian Money Market?


Who are the players and participants in Indian Money market?

Ans: Role of different players and participants in the organized Rector:

(a) RBI: Reserve Bank of India Plays a very important role in the Money market. The objective of RBI operation in the money market is to ensure liquidity and short-term interest rate for achieving the objectives of monetary policy. RBI Plays the role of a middleman and regulator in the money market.

(b) Government: The government is an active player in the money market and, is the biggest borrower in the money market. The government needs to borrow funds in case of a deficit budget when expenditure is more than revenue government raising funds by issue of securities in the money market.

(c) Banks: Banks are very important players in the money market because banks undertake short-term lending and borrowing of funds. The collective operation of banks on a day to-day basis has a major impact on the structure of interest rate and liquidity position.

(d) Financial Institutions: The financial institution undertakes lending and borrowing of short-term funds. They carry out in large volumes and therefore have an important impact on the money market.

(e) Discount and Finance House of India (DFHI): The RBI set up DFHI jointly with public sector banks and all Indian financial institutions to provide liquidity in short term. The DFHI deals in treasury bills, commercial bills, CDs, CPs, short-term deposits, call money market, and government securities. The DFHI also participates in repos operations.

(f) Business Corporates: They deal in the money market mostly to raise short-term funds for satisfying their working capital requirement. They use both the organized and the unorganized sectors of the money market.

(g) Non-Banking Financial Intermediaries: NBFI consists of Mutual funds, Foreign Institutional Investors (FIIs), etc. they accept a deposit in different forms and lend or invest in different economic activities. Their level of participation depends on the regulations. For example, the level of participation of FIIs in the Indian money market is restricted to investment in government securities.

(h) Primary Dealers(PDs): RBI introduced PDs in 1995 to develop an active secondary market for government securities. They also act as underwriters to the government securities.

17. What are the main components of the Unorganized Sector of Indian Money Market?

Ans: The main components of the Unorganized Sector of Indian Money Market:

(a) Indigenous Bankers: They operate as banks, receive deposits, and give loans and deals in hundies. Hundi is a short-term credit instrument. The rate of interest differs from one market to another market and from one bank to another. They are financial intermediaries who provide loans directly to trade and industry and agriculture by money lenders and traders.

(b) Money Lenders: Moneylenders’ primary business is money lending. They operate mainly in villages but they also operate in urban areas. A large amount of loans are given for unproductive purposes. The borrower is agriculture labourers, small farmers, factory workers, small traders, etc.

(c) Financial Brokers: Financial Brokers are middlemen between lenders and borrowers. They are found in all major markets, especially in the cloth market, grain markets, and commodity markets.

(d) Unregulated Non – bank Financial Intermediaries: the Unregulated Non – bank Financial Intermediaries consist of Chit Funds, Nidhis, Loan Companies, and others.

(i) Chit funds: It is a saving institution. The members make contributions of funds regularly. The collected funds are given to some members based on bids or draws.

(ii) Nidhis: The deposit from members are the main source of funds and makes loans to members at a reasonable interest rate for house construction or repairs.

(iii) Loan Companies: It is also known as Finance companies. The total capital of the loan companies is borrowings, deposits, and own funds. They offer a higher interest rate.

18. What are the Features of Foreign Exchange Market?

Ans: The features of the Foreign Exchange Market are as follows:

(i) High Liquidity: The foreign exchange market is the most easily liquefiable financial market in the whole world. This involves the trading of various currencies worldwide. The traders in this market are free to buy or sell the currencies anytime as per their own choice.

(ii) Market Transparency: There is much clarity in this market. The traders in the foreign exchange market have full access to all market data and information. This will help to monitor different countries’ currency price fluctuations through the real-time portfolio.

(iii) Dynamic Market: The foreign exchange market is a dynamic market structure. In these markets, the currency values change every second and hour.

(iv) Operates 24 Hours: The Foreign exchange markets function 24 hours a day. This provides the traders the possibility to trade at any time.

(v) Lower trading Cost: The foreign exchange market features low trading costs because it does not have restrictive barriers to entry or high fees placed on transacting by brokers. With very small percentages being charged for transactions participants can utilise more of their money in trades and this foreign exchange market feature makes it favourable with small participants which widens the market even more.

(vi) Dollar Most Widely Traded: As mentioned before the US dollar is the most widely traded currency in the world and many currencies calculate rate for other currencies through the corresponding US dollar value also known as cross rate.

19. What are the Advantages and Disadvantages of Foreign Exchange Markets?

Ans: Advantages of Foreign Exchange Markets:

(a) High liquidity: The forex market is the largest and most liquid market in the world, making it easy to buy and sell currencies quickly.

(b) Accessibility: The forex market is open 24 hours a day, 5 days a week, and can be accessed by anyone with an internet connection.

(c) Diverse trading options: Traders can choose from a wide range of currency pairs and trading strategies, providing ample opportunities for profit.

(d) Low transaction costs: The cost of trading in the forex market is relatively low compared to other financial markets.

(e) Leverage: Forex trading allows traders to use leverage to increase their trading position, potentially amplifying profits.

(f) Global market: The forex market is a global market, making it a valuable tool for international businesses to manage their currency risk.

(g) Transparency: The forex market is highly transparent, with real-time price data available to all market participants.

Disadvantages of Foreign Exchange Markets:

(a) Volatility: The forex market is highly volatile and can experience sudden and significant price movements, which can lead to large losses for traders.

(b) Risk of leverage: While leverage can increase potential profits, it can also magnify losses and lead to significant financial risk.

(c) High competition: The forex market is highly competitive, and traders must compete with other market participants, including large financial institutions.

(d) Limited regulation: The forex market is not as regulated as other  financial markets, which can lead to fraudulent activities and scams.

(e) Complex market: The forex market can be complex, and traders must have a good understanding of the market and its various factors that affect currency values.

(f) Economic and political events: The forex market is highly influenced by economic and political events, which can cause significant volatility and unpredictability.

(g) High barriers to entry: Trading in the forex market requires a significant amount of knowledge, experience, and capital, making it difficult for inexperienced traders to participate.

20. Write briefly the Types of Foreign Exchange Market.

Ans: The Foreign Exchange Market has its own varieties. We will know about the types of these markets in the section below:

(i) Spot Market: In this market, the quickest transaction of currency occurs. This foreign exchange market provides immediate payment to the buyers and the sellers as per the current exchange rate. The spot market accounts for almost one-third of all the currency exchange, and trades which usually take one or two days to settle the transactions.

(ii) Forward Market: In the forward market, there are two parties which can be either two companies, two individuals, or government nodal agencies. In this type of market, there is an agreement to do a trade a some future date, at a defined price and quantity.

(iii) Future Markets: The future markets come with solutions to a number of problems that are being encountered in the forward markets Future markets work on similar lines and basic philosophy as the forward markets.

(iv) Option Market: An option is a contract that allows (but is not as (such required) an investor to buy or sell an instrument that is underlying like a security, ETF, or even index at a determined price over a definite period of time. Buying and selling ‘options’ are done in this type of market.

(v) Swap Market: A swap is a type of derivative contract through which two parties exchange the cash flows or the liabilities from two different financial instruments. Most swaps involve these cash flows based on a principal amount.

21. ‘What Factors Influence the Foreign Exchange Market?

Ans: Several factors influence the foreign exchange market, including:

(a) Economic indicators: Economic indicators such as inflation, GDP, and employment data can influence currency values, as they affect a country’s economic outlook.

(b) Central bank policies: The monetary policies of central banks, including interest rates and quantitative easing measures, can influence currency values.

(c) Geopolitical events: Political events such as elections, wars, and trade agreements can cause significant currency volatility.

(d) Market sentiment: Market sentiment, including investor confidence and risk appetite, can influence currency values.

(e) Natural disasters: Natural disasters can disrupt economic activity and cause currency values to fluctuate.

(f) Speculation: Speculative trading activity can also influence currency values, as traders buy or sell currencies based on their expectations of future price movements.

22. Who are the Participants in a Foreign Exchange Market?

Ans: There are a wide range of participants in the foreign exchange market, including:

Commercial banks: Banks are the most active participants in the forex market, trading on behalf of their clients and for their own accounts.

(a) Central banks: Central banks participate in the market to manage their country’s monetary policy and stabilize currency values.

(b) Hedge funds and investment firms: These institutions trade in the forex market to generate returns for their clients.

(c) Corporations: Multinational corporations use the forex market to manage their currency risk, particularly when conducting international trade.

(d) Retail traders: Individual traders can participate in the forex market through online brokers, seeking to profit from currency price movements.

(e) Governments: Governments participate in the forex market to manage their currency values and maintain their country’s economic stability.

(f) Traditional Users: The traditional users consist of foreign tourists, the companies who carry out business operations across the globe.

(g) Speculators: The traders and the speculators are the opportunity seekers who look forward to making a profit through trading on short-term market trends.

(h) Brokers: Brokers are considered to be the financial experts who act as a sure intermediary between the dealers and the investors by providing the best quotations.

23. How Does the Foreign Exchange Market Affect the Economy?

Ans: The foreign exchange market plays a crucial role in the global economy, affecting countries in several ways:

(a) International trade: Changes in currency values can affect a country’s balance of trade, as exports become more expensive when a country’s currency appreciates.

(b) Capital flows: The forex market facilitates capital flows between countries, allowing businesses and investors to invest in foreign markets.

(c) Monetary policy: The forex market can influence a country’s monetary policy, as central banks may adjust interest rates or intervene in the market to maintain currency stability.

(d) Economic growth: A stable currency and exchange rate can support economic growth, while currency volatility can harm business and consumer confidence, potentially leading to economic slowdowns.

24. What Causes Exchange Rates to Fall?

Ans: There are several factors that can cause exchange rates to fall:

(a) Decreased demand: If demand for a country’s currency decreases relative to other currencies, its exchange rate may fall.

(b) Economic factors: Economic indicators such as low inflation or slowing economic growth can lead to a fall in a country’s exchange rate.

(c) Political instability: Political instability, such as political protests or leadership changes, can cause a country’s exchange rate to fall.

(d) Central bank policies: If a country’s central bank reduces interest rates or engages in quantitative easing, its currency may weaken.

(e) Trade imbalances: Persistent trade deficits can cause a country’s currency to depreciate as demand for its currency weakens.

25. Mention the advantages and disadvantages of Cell Money Market in India.

Ans: Advantages of Call Money Market in India:

(i) High Liquidity: As the borrowed money as well as lent money could be retrieved at any time so Commercial Banks can meet high payment pressure at ease. So is true for other institution in the Capital Market.

(ii) High Profitability: Banks and other financial institutions could earn money from their idle surplus fund through call market.

(iii) Safe and Cheap: Though call loans are unsecured loan still these are safe because the parties are having high level of financial credibility in Capital Market.

(iv) Aids to Central Banking Operation: It is the most sensitive part of any financial system. Changes in supply and Demand of funds are instantly reflected in call money rate and it gives an indication to the Central Bank to adopt an appropriate monetary policy. Moreover, the existence of an efficient call market helps the Central Bank to carry out its open market operation effectively.

Disadvantages of call money market in India:

(i) Lack of Integration: There is lack of coordination among different call market so the operation is not having integrity.

(ii) Uneven Development: Most of the call money market is around the metropolitan cities and industrial towns like Mumbai, Delhi, Chennai, Pune, Hyderabad, Bangalore and Kolkata, where there is existence of stock exchange.

(iii) Volatile: The call rates are volatile, it varies from 4% to 8%. It changes from time to time, season to season and from purpose to purpose.

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