UPSC Prelims 2023 Q25: Capital Market vs Money Market — Explained
Consider the following markets:
1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market
How many of the above are included in capital markets?
- Only one
- Only two
- Only three
- All four
Answer: (b) Only two
Statement-wise explanation
- 1: correct — The government bond market deals in dated government securities. RBI says these run from 5 to 40 years. That is long-term borrowing, so the market for government bonds is part of the capital market (its debt segment).
- 2: incorrect — RBI defines call money as unsecured borrowing and lending between banks on an overnight basis. Notice money runs from 2 to 14 days. Funds this short belong to the money market, not the capital market.
- 3: incorrect — RBI describes Treasury bills as money market instruments. They are short-term debt of the Government of India, issued for 91, 182 and 364 days. They pay no coupon: they are sold at a discount and repaid at face value. They fall under one year, so they are not capital market instruments.
- 4: correct — The stock market trades shares, which are ownership in a company and have no maturity date. Equity is the classic long-term fund, so the stock market (primary IPOs plus secondary trading) is the core of the capital market.
How to eliminate
This one is settled by a single rule: the one-year line. Funds lent or borrowed for up to one year form the money market. Funds for more than one year form the capital market. Call money is overnight, so it is certainly not a capital market, and you can rule out 'All four' at once. Most aspirants know the stock market is a capital market. That leaves the two government items. The trap is that both are government debt. Separate them by tenor: T-bills are for at most 364 days, so they are money market. Dated bonds run for years, so they are capital market. Remember: 'bill' means short-term and 'bond' or 'dated security' means long-term.
Know more
Financial markets split by maturity
The Indian financial market has two parts, separated by the one-year mark.
| Feature | Money market | Capital market |
|---|---|---|
| Tenor | Up to 1 year | More than 1 year (or no maturity, as with equity) |
| Purpose | Short-term liquidity: working capital, managing cash mismatches | Long-term investment: projects, infrastructure, fiscal deficit |
| Instruments | Call/notice/term money, T-bills, Cash Management Bills, commercial paper, certificates of deposit, repo, TREPS | Shares, corporate bonds and debentures, dated G-secs, State Development Loans |
| Main regulator | RBI | SEBI (equity and corporate debt); RBI (G-sec market) |
Inter-bank money, by tenor
- Call money: overnight
- Notice money: 2 to 14 days
- Term money: 15 days to 1 year
All three are unsecured inter-bank loans. They are where the RBI's policy rate first reaches the market.
Government securities sit in both markets. A G-sec is a tradable debt paper of the Centre or a state. Short-term G-secs (T-bills, Cash Management Bills) are money market papers. Long-term G-secs (dated securities from the Centre, State Development Loans from states) are capital market papers. So the issuer does not decide where an instrument belongs. Its tenor does.
Capital market segments
- Primary market: new securities are issued (IPO, FPO, rights issue, QIP).
- Secondary market: existing securities change hands on exchanges.
Retail investors can now buy both T-bills and dated G-secs directly through the RBI Retail Direct scheme, launched in November 2021. Holding both through one account does not change which market each belongs to.
NCERT Concepts to Revise
- Capital market: The one-year cut-off in this definition is the test for sorting all four markets.
- Money market: The other side of the line; compare it with the capital market definition before classifying each market.
- Call money market: Statement 2 depends on how long call money loans run.
- Treasury bills: Statement 3 depends on the tenor of T-bills, the government's short-term debt paper.
- Government securities: Shows that government securities cover both short and long tenors, which matters for Statements 1 and 3.
- Stock market: Statement 4 depends on what the stock market trades and how long those holdings last.