Detailed Notes on Indian Money Market, Capital Market, Tax Structure, Public Revenue

& Expenditure, and Fiscal Relations

iNDIAN MONEY MARKET – FEATURES & RECENT TRENDS
The money market is the part of the financial market in which financial instruments with high
liquidity and short maturities are traded. Short-term borrowing and lending of funds are dealt
with in the Indian Money Market. It oversees liquidity, controls interest rates, and manages the
nation’s financial system. In India, the money market includes various instruments and a few
institutions that allow businesses and governments to address their short-term funding
requirements. The Indian money market is a vital sector in the financial system.
What is Indian Money Market?
The Indian money market plays a vital role in the country’s financial system by enabling the
lending and borrowing of funds for the short term between financial institutions and individuals.
The transaction completion. Systematic fund allocation, providing liquidity to participants for
the smooth functioning of the economy. The Indian money market is a platform where liquidity
management and price discovery for fund trading occur.
What is Money Market?
The money market is a sector in the financial market where lending, short-term borrowing,
buying, and selling of financial instruments take place. The instruments have maturities of one
year or less. This makes them appropriate for liquidity management as well as short-term
financial requirements. The money market is an arena through which different entities, including
governments, corporations, banks, and investors, can transact. This is to finance transactions that
assist them in obtaining their short-term funding needs or investing their excess funds.
Structure of Indian Money Market
The Indian money market has two segments: the organised (or modern) and unorganised (or
indigenous) sectors.
The organised sector mainly includes well-established financial institutions like the Reserve
Bank of India (RBI), State Bank of India (SBI), nationalised banks, private
scheduled commercial banks, co-operative banks, etc. They are regulated and supervised by the
RBI, which oversees their functioning, interest rates and liquidity management.
Unorganised players comprise sarrafs, Mahajan, sahukars, chettiars, seths, who mostly operate as
moneylenders in semiurban and rural areas. The unorganised sector, which provides credit to
agriculture and small-scale industries, forms a substantial part of the market but does so outside
the RBI’s purview.
Both sectors play a significant role in the Indian money market despite this bifurcation. On the
other hand, the organised sector is more structured and comes directly under the RBI, which
regulates the liquidity of money flow through several means, including repo rates. Yet, despite
being unregulated, the unorganised sector remains significant in terms of trade and industry
credit. These two sectors seldom interact, which might be harmful in terms of integration and
homogenous regulation.
Feature of Indian Money Market
Indian Money Market is a very important component of the Indian financial system that
provides short-term funds. The Indian money market has a few unique features, such as high
liquidity, safety of instruments, diversity of money market instruments, and regulation from the
Reserve Bank of India (RBI) for the functioning of financial markets in an orderly and efficient
manner.
1. High Liquidity: The maturity period of transactions in the Indian money market is 1
year or less, ensuring that the instruments are highly liquid and provide quick returns.
Such a short-term nature helps businesses and governments meet their near-to-medium-
term funding requirements while facilitating a constant capital inflow. It is a great option
for a short-term vision because of the quick investment turnaround.
2. Easy Cash: Businesses, financial institutions, and the government can easily withdraw
cash from the market. If funds are permanently available just in time, businesses need
not wait for working capital, and financial institutions can manage cash flow effectively.
This liquidity also supports the overall stability of the economic system.
3. Safety and Low Risk: Treasuries, T-Bills, and certificates of deposit are considered low-
risk money market instruments. Due to the backing of these instruments by government
bodies or reputable financial institutions, the chance of default is greatly reduced. Thus,
investors can park their money and still earn returns safely in the short term.
4. Guarded by RBI: The Reserve Bank of India (RBI) is the guardian of the Indian money
market and is responsible for regulating it with concrete monetary policies. Answer: It
balances the economy with inflation and growth (by controlling the exchange rate,
interest rates, money supply, etc.). Such regulation is necessary to ensure that speculative
mania does not run out of control and to preserve confidence among investors.
5. Variety of Instruments: The Indian money market provides a range of instruments,
including Treasury bills, commercial papers, and repurchase agreements, allowing
flexibility for borrowers and investors. Such various tools serve the diverse requirements
of the members, providing them with sufficient time to choose a financing or investment
alternative that is suitable for them. The variety keeps the market competitive and the
landscape healthy, rather.
Defects of Indian Money Market
Despite being an important part of the Indian economy, it has various challenges. The
Indian money market is marred by several defects which adversely affect its efficient
functioning. Ÿ Some Defects of the Indian Money Market:
1. Existence of Unorganised Money Market: There is an unorganised segment in the
Indian money market. The unorganised sector, which comprises indigenous
bankers and moneylenders, is not organised; it is not regulated and is outside the
control scope of the Reserve Bank of India (RBI). Consequently, interest rates
become elevated, borrowers face predatory practices, and lenders are restricted in
their access to equitable lending functionalities that undermine overall market
effectiveness.
2. Absence of Cooperation Among Market Participants: The absence of cooperation
among the money market’s key players (financial institutions, banks, the
government, etc.) limits the operation of various participants in the market. The
lack of collaboration creates market inefficiencies and liquidity problems that can
threaten the economy. More is needed to stabilize and function the money market.
3. No Uniformity in Interest Mechanism: Interest rates vary across the sectors and
participants of the Indian Money Market. Such heterogeneity results in indecision
for market constituents since it is difficult to base decision-making on
heterogeneous practices. It also influences how well monetary policy is passed
through and the market’s stability. The rising interest rate environment, a critical
component of financial market functioning, indicates both the liquidity risk and the
risk of abandonment.
4. Lack of a Scheduled Bill Market: A systematic bill market is essential for the
effective functioning of the money market. However, the bill market in India is
relatively nascent. This restricts short-term credit products, such as treasury and
commercial bills, critical for liquidity management and trade financing. Short-term
financing depends on a healthy, regulated bill market.
5. Seasonal Financial Stringency: The Indian money market is subject to seasonal
variations caused by agricultural cycles, festival periods, and government
borrowing patterns. Such market participants face uncertainty due to volatility in
interest rates. Seasonal trends create hurdles for the market, and this is where
several strategies can be adopted to bring stability.
6. Deficiency of Capital in Money Market: There is a capital deficiency in the Indian
money market, which reduces the chances of acquiring funds for the needs of trade
and industry. The sectoral growth and economy as a whole suffer due to this
 shortage of capital. The right amount of capital is important for maintaining
businesses and economic development.
7. Lack of Development in the Indian Money Market: The Indian money market is
less developed than other international money markets. There is a lack of depth and
range of financial products and instruments to stabilize the efficient allocation of
money. An increase in the availability of economic products leads to the better
availability of funds, thereby improving overall financial system growth and
stability.
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Function of Indian Money Market
The Indian money market has various functions that play a crucial role in the free
movement of funds in the economy. The Indian money market is very important to the
overall soundness of the financial system so that businesses and the government can
prosper.
1. Provides Liquidity: The Indian money market supplies short-term funds and
provides liquidity to businesses and the government whenever needed, a vital
function of the money market. This enables them to handle daily operations
without experiencing cash flow problems. It helps the country’s general economy
grow by providing fast access to cash.
2. Interest Rate Regulation: The money market regulates short-term interest rates
through supply and demand for funds. Which helps control inflation and stabilize
the economy. The RBI uses the money market to keep the cost of borrowing and
lending. Also to ensure stability in economic equilibrium.
3. Ensuring Financial Stability: The money market helps ensure that the financial
system is as liquid as possible. Thus preventing liquidity gaps from occurring and
maintaining financial stability within the economy. It ensures smooth economic
transactions by providing easy access to short-term funds. Short-circuiting a
potential economic crisis caused by the absence of liquidity.
4. Helps Government to Raise Money: The money market in India helps issue
Treasury bills. So that the government can raise money for public spending without
borrowing for the long term. Such Government Treasury Bills allow for the smooth
transaction of public projects. While giving the government some short-term
flexibility in managing cash flow.
5. Supports Monetary Policy: The money market is supported by money-market
institutions, where the RBI implements monetary policy, and the liquidity and
interest rates are affected by instruments. This, in turn, helps the country combat
 inflation, manage its money supply, and work towards achieving macroeconomic
stability. This keeps monetary conditions consistent with the government’s
economic goals.
What are the different parts of the Indian money market?
Important constituents of the Indian money market are treasury bills, commercial papers,
certificates of deposit, repurchase agreements, and government securities.
What is the difference between Indian money and capital market?
The Indian money market is made for short-term money (less than one year), whereas the
Capital market is made out of long-term investments like stocks and bonds.
How RBI controls the Indian money market?
The RBI regulates the Indian money market by controlling interest rates and issuing
monetary policy tools. Managing government securities to ensure financial stability.
What are the shortcomings of Indian money market?
Lack of transparency, limited small investor Participation, underdeveloped secondary
Market and Overreliance on Government Securities.
What is the significance of the Indian money market?
Indian money market helps provide liquidity, interest rate regulation, and government
borrowing support and also helps implement monetary policy.

Short notes:-
The Indian Money Market is the market for short-term funds with maturity up to one year.
It forms the backbone of India’s financial system, ensuring liquidity, stability, and the
smooth functioning of the banking sector. This market enables the government, banks, and
corporations to meet short-term financing needs. Because it deals with highly liquid assets,
it is crucial for day-to-day economic management.

Indian Money Market:

1. Deals with Short-Term Funds (≤ 1 year)
The money market includes instruments that mature within one year, making them ideal for
temporary cash shortages.
Example:
A bank may need funds overnight to maintain the CRR (Cash Reserve Ratio). It borrows through
the call money market for just a few hours or a day.
2. Regulated by the RBI under the RBI Act, 1934
The Reserve Bank of India is the central regulator ensuring stability, transparency, and orderly
conduct. RBI monitors interest rates, liquidity, and participation.
Example:
During inflation, RBI increases the repo rate, making borrowing costlier for banks, which
reduces the money supply.

3. Variety of Instruments
The Indian money market is diversified with the following instruments:
a. Treasury Bills (T-Bills)
Short-term government securities issued at a discount and redeemed at face value.
Maturities: 91 days, 182 days, 364 days.
Example:
If a 91-day T-bill is issued for ₹98 and redeemed at ₹100, the discount (₹2) is the investor’s
return.
b. Commercial Paper (CP)
Unsecured promissory notes issued by financially strong companies for short-term working
capital.
Example:
Infosys Issues CP worth ₹500 crore to meet short-term salary obligations instead of taking
a bank loan.
c. Certificates of Deposit (CDs)
Issued by commercial banks to raise short-term funds during times of liquidity crunch.
d. Call Money Market
For very short-term funds — 1 day to 14 days.
Interest rate is called the call rate.
Example:
If a bank has excess cash, it lends in the call market overnight.
e. Repurchase Agreements (Repos)
Short-term borrowing by selling securities with an agreement to repurchase them later.
Example:
A bank sells government securities to RBI today and agrees to buy them back the next day
with interest.

4. Provides Liquidity to Banks and Financial Institutions

Liquidity means availability of cash or near-cash instruments.
Money market instruments help institutions manage temporary mismatches.
Example:
During a sudden withdrawal of deposits, a bank uses the call market to borrow funds.

5. Diverse Participants
Participants include:
 RBI
 Government of India
 Commercial Banks
 Cooperative Banks
 NBFCs
 Mutual Funds
 Large Corporations
This diversity adds depth and stability to the market.

RECENT TRENDS IN THE INDIAN MONEY MARKET

The Indian money market has seen major reforms and modernization in recent decades.

1. Increased Use of Commercial Paper (CP)

Corporates prefer CPs because interest rates are often lower than bank loans. This reduces
dependence on bank financing.
Example:
Tata Motors issued CPs worth ₹800 crore in 2023 at lower interest than term loans.
2. Greater Global Integration
Foreign banks like HSBC, Citibank, Standard Chartered actively participate.
This improves liquidity and promotes international standards.

3. Growing Digitalization
Platforms like NSE, BSE, and CCIL (Clearing Corporation of India Ltd.) bring
transparency, better settlement, and reduced fraud.
Example:
T-bills and commercial papers are now traded online, making pricing more efficient.

4. RBI's Active Use of Repo/Reverse Repo

RBI frequently adjusts repo and reverse repo rates to control inflation, credit growth, and
liquidity.
Example:
After COVID-19, RBI reduced repo rate to boost borrowing, and later increased it to
control rising inflation.

5. Introduction of New Instruments

Innovative tools like:
 Cash Management Bills (CMBs)
 Variable rate repo auctions
 Market stabilization bonds
These instruments help manage temporary mismatches in government cash flows.

6. Stronger Monetary Policy Transmission

Because of electronic trading and market reforms, RBI’s policy changes now influence
banks faster.
Conclusion
The Indian money market is modernizing rapidly, becoming more liquid, digitized, and
globally integrated. It plays a vital role in monetary policy transmission and in maintaining
financial stability. For law students, understanding this market helps interpret RBI laws,
financial regulations, and economic cases.

II. INDIAN CAPITAL MARKET – FEATURES & GROWTH

What is Capital Market?
 Capital Market refers to that part of the broader financial market which provides a
market for borrowing and lending of medium and long-term funds, above 1 year.
o Thus, it caters to the borrowing needs for medium to long term projects and
investments.
 Because of the long maturity period, the Capital Market facilitates the mobilization
and allocation of long-term funds.

– Financial Market is a broad term, referring to any center or arrangement where buyers and sellers part
such as equities, bonds, currencies, and derivatives.
– The Financial Market is classified into two categories.
A. Money Market – Market for trading short-term financial assets with a maturity of upto 1 year
B. Capital Market – Market for borrowing and lending of medium and long-term funds, above 1 year.

Components and Structure of Capital Market

The capital market is a complex system, formed by various components. Various
components and structure of capital market can be classified into the following 3
categories.
Capital Market Participants
Capital Market participants include the individuals and institutions that interact within the
market. These participants can be, broadly, categorized into 2 groups:
 Investors or Suppliers of Capital: These are entities with surplus funds and are
looking to invest. They include individuals, pension funds, insurance companies, and
commercial banks.
 Borrowers or Issuers of Securities: These are entities that raise funds by issuing
various types of securities. They include businesses looking to expand, governments
financing projects, and individuals seeking loans.
Capital Market Instruments
Capital Market Instruments or the Instruments of Capital Market refer to various types of
financial tools used within the market. They include financial securities and derivatives
that serve as mediums and facilitate the flow of money among the participants of the
capital market.
Various capital market instruments can be, broadly, classified into the following types:
 Share or Stock
 Debt Instruments
 Derivatives
 Mutual Funds
 Exchange Traded Funds (ETFs)
 Instruments of Foreign Investments
Each type of capital market instrument has been discussed in detail in our
article Instruments of Capital Market.
Capital Market Infrastructure
Capital Market Infrastructure refers to the institutions that facilitate the smooth operation
of the market. These institutions play a crucial role in connecting various participants and
ensuring their regulated interactions for trading through instruments available in the
market.
Major types of institutions forming part of the capital market infrastructure are as follows:
 Stock Exchanges: Stock exchanges are essentially marketplaces for buying and
selling financial instruments. They act as a central platform where investors and
companies connect.
o Various concepts regarding Stock Exchanges have been dealt with in detail
below.
 Regulatory Bodies: These organizations ensure fair and transparent practices
within the market. Major regulators involved in regulation of Capital Market in
India are:
o Securities and Exchange Board of India (SEBI)

o Reserve Bank of India (RBI)

o Union Ministry of Corporate Affairs, and

o Department of Economic Affairs, Union Ministry of Finance.

  Financial Intermediaries: These institutions connect investors with those seeking
capital.
o Brokers, investment banks, and underwriters are some examples.

Types of Capital Market

Based on the type of securities traded, the Capital Market is of 2 types:
Primary Market or New Issue Market
 The Primary Market is the type of Capital Market where new securities are issued
for the first time.
o Thus, it is also called the New Issue Market.

 The primary market provides the channel for the sale of new securities. The issuer
of securities sells the securities in the primary market to raise funds for investment
and/or to discharge.
o In other words, the market wherein resources are mobilized by companies
through the issue of new securities is called the primary market.
Secondary Market or Old Issue Market
 The Secondary Market refers to a market where those types of securities are
traded, which have already been issued and offered to the public in the Primary
Market and/or listed on the Stock Exchange.
o Thus, it is also called the Old Issue Market.

 The secondary market enables securities holders to adjust their holdings in response
to changes in their assessment of risk and return or to buy/sell their securities as per
their liquidity needs.
Difference between Primary Market and Secondary Market

Primary Market Secondary Market

New market securities are sold. Only existing securities

Investors have the option of only buying the securities. Investors can both buy

The price of securities is mostly decided by the management of the issuing The price of securities
company. of the market.

Secondary Markets are

Primary Markets have no fixed geographical location.
Stock Exchange.
Primary Market Secondary Market

Major intermediaries – Merchant Banks, Underwriters, Debenture Trustees,

Major intermediaries –
Portfolio Managers, etc.

The functioning dynamics of both types of markets are discussed in detail in the sections
that follow.
Primary Market or New Issue Market: Concepts
Types of Issues in Primary Market
The issue of new securities in the Primary Market occurs through various methods as
discussed below.
Public Issue or Public Offering
 Public Issue or Public Offering refers to the process of a company offering its
securities (usually stocks or bonds) for sale to the general public for the first time or
subsequently.
 It is the usual way through which companies raise capital from a broad range of
investors.
 There are 2 main types of public issues:
Initial Public Offering (IPO)
 Initial Public Offering (IPO) refers to the process when a private or unlisted
company sells its shares to the public for the very first time.
 This process transforms the company from being privately owned to a public
company.
o This is why an IPO is also referred to as “going public”.

 It is generally used by new and medium-sized firms that are looking for funds to
grow and expand their business.
 After IPO, the company’s shares are traded in an open market.
o Those shares can be further sold by investors through secondary market
trading.
Follow on Public Offering (FPO)
 Follow on Public Offering (FPO) refers to the process when a company, that has
already issued shares and is listed on a stock exchange, issues shares again to raise
additional fund.
  Public companies have to sell at least 25% of their shares to the public to be traded
on a stock exchange. Usually, it is this requirement that makes companies go for
FPOs.
Offer For Sale
 Under this method, securities are not issued directly to the public but are offered for
sale through intermediaries like issuing houses or stock brokers.
 In this case, a company sells securities enbloc at an agreed price to brokers who, in
turn, resell them to the investing public.
Bonus Issue or Scrip Issue or Capitalization Issue
 It refers to offer of share to the existing shareholders against their distributable
profit.
 Thus, under this, shareholders’ share in profit is converted as shares.
Rights Issue
 Rights Issue is an invitation to existing shareholders to purchase additional new
shares in the company.
 This type of issue gives existing shareholders rights to purchase new shares at a
discount to the market price on a stated future date.
o That’s why it is called Rights Issue.

Private Placement
When an issuer makes an issue of securities to a limited group of pre-selected investors, and
which is neither a rights issue nor a public issue, it is called a private placement.
Private placement can be of 2 types:
Preferential Allotment
When a listed issuer issues shares or convertible securities to a select group of persons, it is
called a Preferential Allotment.
Qualified Institutional Placement (QIP)
When a listed issuer issues shares or convertible securities to a select group of Qualified
Institutional Buyers (QIBs), it is called a Qualified Institutional Placement (QIP).
Key Terminologies Related to Primary Market
Declared Price Issue
Its a method of pricing new issues wherein the issuer offers securities at a pre-fixed price.
Book Building Issue
Its is another method of pricing new issues wherein the price is not announced beforehand.
Rather, the issuer, first, offers the shares and gets application from public and then based
on the demand fixes the price.
Authorized Capital
It is the maximum amount authorized by Memorandum of Association of a company that
can be raised by the company. The issuer can issue securities upto worth this amount only.
Issued Capital
It is the actual amount issued by the issuer. It may be equal to or lesser than the Authorized
Capital.
Subscribed Capital
After the company issues shares, the public starts subscribing to those shares. The
subscription can be oversubscribed (demand of shares more than the issued number of
shares) or undersubscribed (demand of shares less than the issued number of shares). The
actual amount subscribed is called Subscribed Capital.
Merchant Bankers
A “merchant banker” means any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying or subscribing to
securities or acting as manager, consultant, adviser or rendering corporate advisory service
in relation to such issue management.
Underwriting
Underwriting means an agreement with or without conditions to subscribe to the securities
of a body corporate when the existing shareholders of such body corporate or the public do
not subscribe to the securities offered to them.
Underwriter
The financial intermediary which agrees to purchase the undersubscribed portion of issued
capital is called Underwriter.
Called Up Capital
The company usually collects the subscribed capital in installments. The portion of money
demanded from subscriber is known as Called Up Capital.
Paid Up Capital
The amount actually paid by subscribers, when the money is demanded by the issuer, is
known as Paid Up Capital.
Reserve Capital
Usually, the issuer does not demand the whole amount from the subscriber. A small portion
of money is left un-demanded, which is called Reserve Capital.
Secondary Market or Old Issue Market: Concepts
Components of Secondary Market
Based on the type of trading, the secondary market has 2 components:
Over-The-Counter (OTC) Market
 Over-The-Counter Markets or OTC Markets are essentially informal markets for
trading securities.
 It is a decentralized marketplace where securities are traded directly between two
parties, bypassing a central exchange.
 OTC markets are generally subject to less stringent regulations than exchanges.
Stock Exchange Market
It refers to markets for trading of securities through a centralized exchange, usually called
Stock Exchange.
Key Terminologies Related to Secondary Market
Listed Securities
Listed Securities refer to those securities that are accepted to be traded in stock exchanges.
Cash Trading
Its a type of trading in the Secondary Market wherein the sale and purchase of securities
takes place at the prevailing price on the day of trading.
Forward Trading
Its another type of trading in the Secondary Market wherein both buyer and seller agree to
buy and sell respectively at a future date at a pre-agreed price, irrespective of the price that
prevails on the day of trade.
Third Market
 Third Market refers to the trading of exchange-listed securities in the over-the-
counter (OTC) market.
  It allows institutional investors to trade blocks of securities directly, rather than
through an exchange, providing liquidity and anonymity to buyers.
Fourth Market
Fourth Market refers to institution-to-institution trading directly, without using the service
of broker-dealers, thus avoiding both commissions, and the bid–ask spread.
Stock Exchange
 A Stock Exchange is a regulated marketplace where investors can buy and sell
shares of publicly traded companies.
o It acts as a central hub for facilitating stock trading in a secure and efficient
manner.
 In India, a Stock Exchange can operate only if it is recognized by the Government
under the Securities Contracts (Regulation) Act, 1956.
Stock Exchanges of India
Bombay Stock Exchange (BSE)
 The Bombay Stock Exchange (BSE) is India’s largest and earliest securities market.
 It is also Asia’s first stock exchange.
 BSE On-Line Trading (BOLT) is a screen-based automated trading platform of
BSE.
 The BSE also offers depository services through one of its arms called the Central
Depository Services Limited (CDSL)
National Stock Exchange of India Ltd. (NSE)
 The National Stock Exchange of India Ltd. (NSE) is India’s largest financial
market.
 It ranks fourth in the world by equity trading volume.
 NSE is the first exchange in India to provide modern, fully automated electronic
trading.
Stock Market Index
 A Stock Market Index is a statistical measure that reflects the overall performance
of a specific segment of the stock market, or the entire market itself.
  Each index is composed of a weighted values of specific group of stocks chosen
based on certain criteria such as Market Capitalization, Representation of various
sectors, etc.
 From each sector, top companies are selected on the basis of total value of all shares
that are traded in the stock exchange.
o These companies are called Blue Chip Companies.

 It acts as an indicator of rise or fall in the prices of shares or other securities.

 Investors use Stock Market Indices as a benchmark to track market movements and
compare the performance of their investments.
Important Stock Market Indices in India
BSE Sensex or Sensitive Index
It is an index of BSE, which measures the price movement of top 30 companies’ shares.
Nifty or National Index for Fifty
It is an index of NSE, which measures price movement of top 50 companies.
Nifty Junior
It is an index of NSE, which measures the price movement of the next top 50 companies.
Roles and Importance of Capital Market
The Capital Market, as the major channel for mobilization of funds, plays very crucial role
in an economy. Some of the its major roles and importance can be seen as follows:
 Mobilization of Savings: It mobilizes idle savings or funds from people for further
investments in the productive channels of an economy.
 Capital Formation: Through mobilization of ideal resources it helps in formation of
capital.
 Investment Avenues: It enables to raise resources for longer periods of time. Thus it
provides an investment avenue for people who wish to park their resources for a
long period of time and earn reasonable return.
 Economic Growth and Development: As it makes funds available for long period of
time, the financial requirements of business houses are met by the capital market.
This, in turn, helps them grow.
 Optimal Allocation of Fund: By enabling price discovery as per the demand and
supply, it helps in optimal allocation of financial resources.
  Service Provision: As an important financial set up, capital market provides various
types of services. It includes long term and medium term liquidity to industry,
underwriting services, consultancy services, export finance, investor education by
widening ownership base.
 Barometer of Economic Health: The performance of the Secondary Market acts as
the barometer of economic health. The investors use the level of stock exchange
indices as a benchmark to track market movements and compare the performance
of their investments.
Regulation of Capital Market in India
 Securities Contracts (Regulations) Act, 1956: It gives Central Government
regulatory jurisdiction over
o stock exchanges – through a process of recognition and continued
supervision.
o contracts in securities, and

o listing of securities on stock exchanges.

 Companies Act, 2013: It regulates incorporation of a company, lays down

responsibilities of a company, directors, dissolution of a company.
o The Companies Act is mainly administered by the Union Ministry of
Corporate Affairs.
 SEBI Act, 1992: It has established the Securities and Exchange Board of India
(SEBI) as the primary regulator of securities markets in India.
 Depositories Act, 1996: It provides a legal framework for establishment of
depositories to facilitates holding of securities in physical/dematerialised form and
to effect the transfer of securities through book entry only.
 RBI’s Provisions for NBFCs: Of late, the RBI has proposed a significant shift in its
regulatory approach towards the NBFCs.
The Capital Market serves as a vital channel for mobilizing savings into investments, and
hence driving economic growth and prosperity. As India aims to grow faster in the time
times to come, the role of the Capital Market is going to become even more important.
Efforts should be taken to ensure its efficient functioning by focusing on transparency,
fairness, and regulatory oversight to maintain investor confidence and market integrity.
Related Concepts
Qualified Institutional Buyers (QIBs)
  Qualified Institutional Buyers (QIBs) are those institutional investors who are
generally perceived to possess expertise and the financial muscle to evaluate and
invest in the capital markets.
 Some prominent examples of QIBs are – Insurance companies, provident funds,
pension funds.
Commodity Exchange
 A commodity exchange is an exchange where various commodities, derivative
products, agricultural products and other raw materials are traded.
 The commodity exchanges in India includes – National Spot Exchange Limited
(NSEL), Indian Commodity Exchange Limited (ICEX), Multi Commodity
Exchange (MCX), etc.
 Commodity Exchanges in India are regulated by the Securities and Exchange Board
of India (SEBI).
o Earlier, they were regulated by the Forward Markets Commission (FMC),
which got merged with the SEBI on September 28, 2015.
FAQs on Capital Market
What is Indian Capital Market?
Indian Capital Market is a component of Indian Financial Market which provides a
market for borrowing and lending of medium and long-term funds, above 1 year.
Who controls the Capital Market in India?
The Indian capital market isn’t controlled by a single entity, but rather overseen by a
number of regulatory bodies, including Securities and Exchange Board of India (SEBI),
Union Ministry of Corporate Affairs, Reserve Bank of India (RBI), etc.
Who regulates the Capital Market in India?
There are several bodies involved in regulation of Capital Market in India. They include –
Securities and Exchange Board of India (SEBI), Union Ministry of Corporate Affairs,
Reserve Bank of India (RBI), etc.
Why do we need Capital Market?
The Capital Market is the major channel for mobilization of funds from investors to
borrowers.
====================================================================
=========short notes
The Indian Capital Market deals with long-term funds that support investment, industrial
growth, and wealth creation. It consists of equity markets, bond markets, mutual funds,
and derivatives markets. Capital markets channel savings from households to businesses
and the government.

FEATURES OF THE INDIAN CAPITAL MARKET

1. Handles Long-Term Funds (> 1 year)
Funds raised here are used for long-term investments such as:
 business expansion
 infrastructure
 new projects
Example:
Reliance Industries raises billions through bonds to build 5G infrastructure.

2. Two Major Segments — Primary & Secondary

a. Primary Market (New Issue Market)
Companies raise capital for the first time through IPOs or FPOs.
Example:
Zomato and LIC raised thousands of crores through IPOs to expand operations.
b. Secondary Market (Stock Exchanges)
Existing securities are traded among investors on NSE and BSE.
This provides liquidity and real-time price discovery.
Example:
When an investor buys HDFC Bank shares on NSE, the company does not directly receive
money; another investor sells those shares.

3. Regulated by SEBI (Securities and Exchange Board of India)

SEBI ensures:
 investor protection
  transparency
 fair play
 prevention of insider trading
 monitoring of stock brokers
Example:
SEBI penalized Reliance Industries in the 2007 insider trading case to protect market
integrity.

4. Wide Spectrum of Instruments

 Equity shares
 Debentures and corporate bonds
 Government bonds
 Mutual fund units
 Exchange Traded Funds (ETFs)
 Derivatives (futures & options)
Example:
Nifty 50 futures are widely used by traders to hedge or speculate.

5. Diverse Participants
Participants include:
 Retail investors
 Institutional investors
 FIIs/FPIs
 Mutual fund houses like HDFC MF
 Banks and Insurance companies
 Stock brokers
Participation from foreign investors increases liquidity and deepens the market.
GROWTH OF THE INDIAN CAPITAL MARKET
Since liberalization in 1991, the Indian capital market has undergone significant reforms.

1. Development of World-Class Stock Exchanges (NSE & BSE)

India’s stock exchanges use advanced technology with:
 T+1 settlement cycle (one of the fastest globally)
 automated trading
 high transparency
Example:
The BSE Sensex and NSE Nifty indices are globally tracked benchmarks.

2. Surge in FDI and FPI Participation

Post-1991 reforms allowed foreign portfolio investors (FPIs) and foreign direct investment
(FDI).
This brought in capital, technology, and better corporate practices.
Example:
FPIs invested billions into Indian equities during 2020–23, supporting market growth.

3. Growth of Derivatives Market

India is one of the largest derivatives markets in the world.
Examples:
 Nifty futures
 Bank Nifty options
 Currency derivatives
Derivatives help investors manage risk.

4. Rise of Mutual Funds and SIP Culture

Middle-class investors now prefer mutual funds over traditional savings.
Example:
Monthly SIP flows crossed ₹20,000 crore in 2024, showing strong retail participation.

5. Expansion of Corporate Bond Market

Companies issue long-term bonds for infrastructure, renewable energy, and expansion.
Example:
NTPC and NHAI issue government-backed bonds used for road and power projects.

6. Digital & Online Trading Revolution

Platforms like Zerodha, Groww, and Upstox have democratized investing.
Trading now takes place entirely online with high transparency.

7. Stronger SEBI Regulations

After scams like Harshad Mehta (1992) and Ketan Parekh (2001), SEBI has strengthened
rules on:
 insider trading
 algorithmic trading
 disclosure norms
 corporate governance
This increased investor confidence.

8. Introduction of New Products

 REITs
 INVITs
 Sovereign Gold Bonds
 ETFs
Example:
Embassy REIT allows investors to invest in commercial real estate with small amounts.
Conclusion
The Indian capital market has evolved into a technologically advanced, globally integrated,
and highly regulated financial ecosystem. With the rise of mutual funds, digital trading,
and strong SEBI oversight, India’s capital market is one of the most robust among
emerging economies. For law students, understanding this market is crucial because
corporate laws, securities regulations, and financial legislation heavily depend on capital
market functioning.
=====================================================================

Key trends in the money market include a shift in central bank monetary policy from fighting
inflation to stimulating growth, increased reliance on secured lending, and the ongoing impact of
artificial intelligence (AI) and fintech innovations. While central banks are cautiously navigating
economic uncertainties, technology is driving significant shifts in financial services, making the
money market more efficient and accessible.
Central bank policy shifts
After a period of aggressive monetary policy tightening in 2022 and 2023 to combat inflation,
many central banks have adopted a more dovish or balanced stance in 2024 and 2025.
 Rate cuts and easing policy: Some central banks, like the U.S. Federal Reserve and the
European Central Bank, have started implementing rate cuts as inflation subsides and
economic growth weakens. The Reserve Bank of India also reduced its repo rate in mid-
2025.

 Fiscal expansion: Political shifts, such as the U.S. presidential election, have raised
expectations for new rounds of fiscal expansion and deregulation, which could influence
interest rate trajectories and lead to higher volatility.

 Examples:

o U.S. Federal Reserve: Cut rates in mid-2024 to mitigate recessionary pressure,

signaling a shift from fighting inflation to stimulating growth.

o Reserve Bank of India (RBI): Implemented a strategic rate reduction in 2024,

followed by a larger cut in mid-2025, aimed at stimulating growth while
maintaining price stability.

Increased demand for secured funding

Regulatory pressures on banks have contributed to a growing gap in unsecured funding markets,
causing financial institutions to shift toward secured funding to obtain term liquidity.
  Repo market changes: Heightened regulatory requirements have made dealer-banks less
willing to lend to each other in the unsecured market. Instead, they increasingly rely on
the secured "repo" market, which uses assets like fixed-income securities as collateral.

 Money Market Fund (MMF) growth: Money market funds saw strong inflows in 2024
and 2025, driven by attractive interest rates and economic uncertainty. Institutional
demand has focused on government funds, which are generally seen as safer.

 Example: In early 2024, a study of the Indian money market noted a 44% decrease in
banks' unsecured cash borrowings as secured funding increased rapidly.

Digital transformation and fintech innovation

The proliferation of digital technologies continues to reshape how financial services are
delivered, making money market products more accessible and efficient.
 Neobanking and mobile payments: Digital-only banks (neobanks) and mobile payment
apps (like UPI in India, and Venmo and PayPal in the U.S.) are increasingly used for
everyday transactions. This reflects a broader consumer preference for digital, cashless
financial services.

 Robo-advisors: Algorithmic tools that automate investment strategies are making

investment and wealth management more accessible and affordable for ordinary
investors.

 Examples:

o India's Fintech Ecosystem: A massive increase in digital adoption and

smartphone usage has fueled the growth of platforms like Groww, bringing
millions of new investors into the market.

o Buy Now, Pay Later (BNPL): This digital lending model, offered by companies
like Affirm, allows consumers to space out payments for purchases, and its
growth has been driven by increased online shopping.

AI and automation integration

Artificial intelligence (AI) is moving beyond the hype cycle to provide tangible benefits, with
financial institutions integrating AI and machine learning (ML) to improve operations and
service delivery.
  Enhanced efficiency and security: AI is used for real-time risk management, fraud
detection, and the automation of back-office operations. It can process complex,
unstructured data, such as earnings releases, to enhance analytical tools for investors.

 Personalization and customer experience: AI-powered chatbots and predictive

analytics are used to offer more personalized banking experiences and investment advice.

 Examples:

o Fraud Detection: AI systems monitor transaction patterns to flag and prevent

fraudulent activity in real-time, improving security for online banking and credit
card payments.

o Algorithmic Trading: In the money market and beyond, AI algorithms analyze

vast datasets to automate trades, saving time and improving execution.

Digital cash and tokenization

The maturation of digital assets is leading to the broader use of digital cash transactions and the
tokenization of real-world assets.
 Central Bank Digital Currencies (CBDCs): Many central banks are exploring and
piloting CBDCs, which could fundamentally change how value is exchanged.

 Tokenization of assets: The use of Distributed Ledger Technology (DLT) for the
tokenization of assets, including bonds and other securities, is gaining momentum and is
expected to drive efficiency in capital markets.

 Example: The Reserve Bank of India has piloted its own digital currency, e-RUPI, for
specific use cases and plans to expand it for broader retail payments.

Focus on sustainable and ESG investing

Environmental, Social, and Governance (ESG) factors continue to influence financial markets,
with banks and investors increasingly focused on sustainable finance.
 Climate-linked finance: The push toward net-zero goals has created opportunities for
banks to fund clean energy technologies and projects. Companies are issuing capital to
invest in infrastructure for artificial intelligence and its high energy needs.

 Regulatory frameworks: Regulators are incorporating sustainable finance into their

oversight, with initiatives such as India's Carbon Credit Trading Scheme, which was
launched in 2024 and became effective in 2026.
  Example: The Carbon Credit Trading Scheme aims to incentivize low-carbon practices
by allowing entities to trade carbon credit certificates based on their emission targets.
====================================================================
=====. Recent Trends in the Money Market (With Examples)short notes

a) Integration with Global Markets

Foreign investors now participate more freely.
Example: Foreign banks like HSBC and Citi Bank actively invest in Indian short-term
instruments.
b) Growing Use of Commercial Papers
Corporates prefer CPs because interest rates are lower than bank loans.
Example: Tata Motors Finance raising large funds through CPs in 2024-25.
c) Electronic Trading
Platforms like NSE and BSE allow digital trading.
Example: A bank can buy T-Bills on the NSE platform with one click.
d) Active Repo and Reverse Repo Operations
RBI uses these to control money supply.
Example: When inflation rises, RBI increases repo rate to reduce money circulation.
e) Introduction of New Instruments
Short-term government and corporate bonds are becoming popular.
Example: Government issues Cash Management Bills for urgent short-term needs.

III. Measures of Money Supply in India (With Examples)

What is Money?
Money is defined as something that is generally accepted by society as a medium of
exchange and which can act as a unit of account, a store of value, and be used for
repayment of debt.
Money developed as a better alternative to the barter system of trade that had existed
across the world since ancient times.
Barter System and Evolution of Money
The Barter System refers to the act of trading goods and services between two or more
parties directly, without the use of an intermediary monetary medium, such as money or
credit card. In other words, the barter system involves an exchange of one kind of goods
and services for another kind of goods and services.
The barter system has been in use since the beginning of recorded history. However, as the
economy grew in terms of its size and number of economic players, this system of trade
started facing several difficulties as explained below:
 Issue of Double Coincidence of Wants: “Double Coincidence of Wants” means that
if one wants to exchange some goods with another person then the latter must also
be willing to exchange his goods with the first person.
o For example, a person, who wants clothes and has rice with him to offer in
return, can exchange rice for cloth with only that another person who has
 cloth and who also wants rice. In practical life, finding such a person might
be difficult.
 Issue of Large and Long Storage: In a barter system, a person must store a large
volume of his own goods in order to exchange for his/her desired goods with others
on a day-to-day basis. However, the good loses its original quality and value if it is
stored for a long period.
These problems of the Barter System meant that as human civilization progressed, people
felt the need for some common medium of exchange that could be easily carried, stored,
and used to express the value of a good. It is this need that brought the money into being.
Major Functions of Money
The main functions of money in a modern economy can be seen as follows:
 Medium of Exchange: The primary and unique function of money is to serve as a
medium of exchange. It resolves the issue of double coincidence of wants and
facilitates economic exchanges with ease.
 Unit of Account: Money is the common standard for measuring the relative worth of
goods and services. This makes it easier to compare values and setting prices.
 Store of Value: Money also serves as a store of value. People can hold their wealth in
the form of money. Money provides a liquid store of value because it is easy to spend
and store.
 Standard of Deferred Payments: Money facilitates transactions that are not settled
immediately but require a future payment.
 Means of Payment: Money is used to settle debts and pay for obligations, including
taxes, fees, and fines.
Types of Money
Economies across the world make use of various forms of money as can be seen below:
Commodity Money
Commodity money is that type of money that possesses intrinsic value of its own,
independent of any governing body. This means the money itself contains a worth.
Numerous commodities such as gold, silver, copper, chocolate beans, etc, have been used as
Commodity Money.
Metallic Money
Metallic Money refers to money that is made up of pure and superior metals like gold and
silver. Convenience, storability, high-value density, and easy portability led metallic money
to take the place of commodity money.
Paper Money
Paper money consists of currency notes issued by the government or the central bank of a
country.
Fiat Money
 Fiat Money refers to Government-issued money, not backed by any physical
commodity like gold and silver, but by the Government that issued it.
o This type of money does not have any intrinsic value as such. Rather, they
derive their value from the guarantee provided by the issuing authority.
  Currency notes and coins in India are examples of fiat money.
o In India, every currency note and coin bears on its face, a promise from
the Governor of RBI that if someone produces them to RBI or any other
commercial bank, RBI will be responsible for giving the person purchasing
power equal to the value printed on them.
 Fiat Money is also called legal tenders as they cannot be refused by any citizen of the
country for settlement of any kind of transaction.
o Cheques drawn on savings or current accounts and Demand Deposits
(DD) are not legal tenders as they can be refused by anyone as a mode of
payment.
Bank Money or Credit Money
 Bank Money or Credit Money refers to money held in the form of demand deposits
with commercial banks.
 Demand deposits of banks are withdrawable through cheques. However, a cheque
by itself is not money, it is only a credit instrument that is used and accepted as a
medium of exchange.
o Therefore, credit money is regarded as ‘near money’.

Plastic Money
Plastic money is a term that is used predominantly in reference to the hard plastic cards in
place of actual bank notes. They can come in many different forms such as cash cards,
credit cards, debit cards, etc.
Helicopter Money or Helicopter Drop
 Helicopter Money or Helicopter Drop refers to increasing the supply of money in an
economy through measures such as more spending, tax cuts, etc.
 It is, basically, an expansionary fiscal or monetary policy that involves printing large
sums of money and distributing it to the public in order to stimulate the economy.
 The term ‘Helicopter Drop’ was coined by the American economist Milton
Friedman in 1969.
Digital Money or Electronic Money
 Digital Money or Electronic Money refers to any means of payment that exists in a
purely electronic form.
 Unlike other forms of money, Digital Money is not physically tangible.
  At present, this form of money is increasingly becoming prevalent with the rise of
online banking and digital wallets.
Money Supply
 The total stock of money in circulation among the public at a particular point in
time is called money supply or supply of money.
 It is to be noted the term ‘public’ refers to households, firms, local authorities,
companies, etc, and does not include the government and banks.
o Thus, public money does not include money held by

 the government
 the RBI (in the form of CRR), and
 the commercial banks (in the form of SLR).
 Money, forming part of the Supply of Money, can be in the following forms:
o Currency Notes and Coins (CU)

o Demand Deposits such as Saving Bank Deposits (DD) – These are those
deposits that can be withdrawn on demand from banks.
o Other Deposits such as Time Deposits/Term Deposits/Fixed Deposits – These
are those deposits that can be withdrawn only after a specific time.
o Money held in Post Office Saving Accounts.

o Deposits of Banks in other Banks/RBI (except CRR).

Money Supply Measures

Money Supply Measures refer to the tools used to measure the supply of money in an
economy. In India, the RBI has been using the following tools as money supply measures:
 M0 (or Reserve Money)
 M1 (or Narrow Money)
 M2
 M3 (or Broad Money)
 M4
The following points are to be noted w.r.t. these Money Supply Measures:
 These measures of the supply of money vary in terms of the liquidity they possess.
 The decreasing order of liquidity of these monetary aggregates is: M0 > M1 > M2 >
M3 > M4.
o This decline in liquidity indicates the shifting of its nature from a ‘medium of
exchange’ to a ‘store of value’.
 In India, mostly M0, M1, and M3 are used, while M2 and M4 are rarely used.
M0 (Reserve Money)
M0 is the sum of
 Currency in Circulation
 Bankers’ Deposits with RBI, and
 ‘Other’ Deposits with RBI
Here, ‘Other’ Deposits with RBI comprise mainly:
 Deposits of quasi-government and other financial institutions including primary
dealers,
 Balances in the accounts of foreign Central banks and Governments,
 Accounts of international agencies such as the International Monetary Fund, etc.
M1 (Narrow Money)
M1 is the sum of
 Currency with the Public, and
 Net Demand Deposits held by Commercial Banks
M2
M2 is the sum of
 M1, and
 Savings Deposits with Post Office Savings Banks
M3 (Broad Money)
M3 is the sum of
 M1, and
 Net Time Deposits with the Banking System
M4
M4 is the sum of
 M3, and
 Total Deposits with Post Office Savings Organizations (excluding National Savings
Certificate)
New Monetary Aggregates
The Working Group on Money Supply: Analytics and Methodology of Compilation
(Chairman: Dr. Y.V. Reddy), in 1998, recommended the compilation of 4 monetary
aggregates on the basis of the balance sheet of the banking sector in conformity with the
norms of progressive liquidity. The RBI has started publishing these new monetary
aggregates as a measure of supply of money:
 NM0 (Monetary Base)
 NM1 (Narrow Money)
 NM2
 NM3 (Broad Money)
NM0 (Monetary Base or Reserve Money)
NM0 is the sum of
 Currency in Circulation
  Bankers’ Deposits with RBI, and
 ‘Other’ Deposits with RBI
Here, ‘Other’ deposits with RBI comprise mainly:
 Deposits of quasi-government and other financial institutions including primary
dealers,
 Balances in the accounts of foreign Central banks and Governments,
 Accounts of international agencies such as the International Monetary Fund, etc.
NM1 (Narrow Money)
NM1 is the sum of:
 Currency with the Public
 Current Deposits with the Banking System
 Demand Liabilities Portion of Savings Deposits with the Banking System, and
 ‘Other’ Deposits with RBI
Thus, NM1 includes currency with the public and non-interest-bearing deposits with the
banking sector including that of RBI.
NM2
NM2 is the sum of:
 NM1, and
 Short-term Time Deposits of Residents (including and up to the contractual
maturity of 1 year)
NM3 (Broad Money)
NM3 is the sum of:
 NM2,
 Long-term Time Deposits of Residents, and
 Call/Term Funding from Financial Institutions.
Thus, NM3 captures the complete balance sheet of the banking sector.
Liquidity Aggregates
In addition to the New Monetary Aggregates, the Working Group had also recommended
the compilation of three Liquidity Aggregates – L1, L2, and L3.
L1
L1 is the sum of:
 NM3, and
 All Deposits with the Post Office Savings Banks (excluding National Savings
Certificates).
L2
L2 is the sum of:
 L1,
 Term Deposits with Term-Lending Institutions and Refinancing Institutions (FIs),
 Term Borrowing by FIs, and
 Certificates of deposit issued by FIs.
L3
L3 is the sum of:
 L2, and
 Public Deposits of Non-Banking Financial Companies (NBFCs)
Velocity of Money
The velocity of money is a measurement of the rate at which money is exchanged in an
economy. In simple terms, it refers to:
 the number of times that money moves from one entity to another, OR
 the number of times a unit of currency is used in a given period of time, OR
 the rate at which consumers and businesses in an economy collectively spend money.
The velocity of money is usually measured as a ratio of GDP to a country’s Total Money
Supply. Thus,
Velocity of Money = GDP/Total Money Supply
Significance of Velocity of Money
  Indicator of Robustness of Economy: Velocity is important for measuring the rate at
which money in circulation is used for purchasing goods and services. This helps
investors gauge how robust the economy is.
 Indicator of Inflation: It is also a key input in the determination of an economy’s
inflation calculation. Economies that exhibit a higher velocity of money have a
higher rate of inflation, and vice versa.
 Important for GDP Growth: A higher Velocity of Money is also important for
ensuring higher GDP growth. This is illustrated as follows:
o Velocity of Money = GDP/Total Money Supply
Hence, GDP = Money Supply × Velocity of Money
Thus, GDP cannot be controlled through the supply of money alone.
 If there is an increase in money supply, but the velocity of money decreases, the GDP
may stay the same or even decline.
 If the supply of money is decreased, but the velocity of money increases, GDP could
increase.
Therefore, an increase in the supply of money does not necessarily lead to an increase in
GDP or inflation without taking the velocity of money into consideration.
The concepts of Money and Money Supply are foundational to understanding economic
dynamics. As economies continue to evolve, with digital currencies and new forms of
transactions emerging, the definitions and implications of Money and Money Supply will
likely adapt.
FAQs on Money and Money Supply
What Constitutes Money?
Anything that can serve as a medium of exchange, a unit of account, a store of value, and
be used for repayment of debt can be called Money. There are various types of money such
as Commodity Money, Metallic Money, Paper Money, etc.
What is meant by ‘Currency in Circulation’?
“Currency in Circulation” refers to banknotes and coins that are not held by the Central
Bank or banking institutions, but are instead in the cash reserves of banks or in the hands
of the public and are actively being used in an economy for transactions.
How does the Central Bank control the Money Supply?
The Central Bank makes use of various monetary policy instruments to control the supply
of money in an economy.
What role does the Supply of Money play in Inflation?
Inflation is more or less directly related to the money supply in an economy. The higher the
supply of money, the higher the inflation, and vice versa.
How does the Money Supply impact interest rates?
The supply of money and interest rates have an inverse relationship. This means that
generally, as the supply of money in an economy increases, interest rates tend to decrease,
and vice versa.

M1 (Narrow Money)
Includes:
 Currency with the public
 Demand deposits
 Other deposits with RBI
Example: Cash + money in a current account.
M2
M1 + post office savings deposits.
M3 (Broad Money)
M1 + all bank deposits (commonly used measure).
Example: Savings account balance + fixed deposits.
M4
M3 + total post office deposits.

Control of Money Supply by RBI

The RBI controls the money supply using monetary policy tools like the Cash Reserve
Ratio (CRR), Statutory Liquidity Ratio (SLR), repo and reverse repo rates, and open
market operations (OMO). By adjusting these instruments, the RBI can increase or
decrease the amount of money in circulation to manage inflation and stimulate or cool the
economy.
Quantitative tools
  Cash Reserve Ratio (CRR):
The percentage of a bank's total deposits that it must hold as cash reserves with the RBI.
 To decrease money supply: The RBI increases CRR, leaving banks with less
money to lend.
 To increase money supply: The RBI decreases CRR, allowing banks to lend
more.
 Statutory Liquidity Ratio (SLR):
The percentage of a bank's deposits that it must keep in liquid assets like gold or
government securities.
 To decrease money supply: The RBI increases SLR, requiring banks to hold
more liquid assets and reducing their lending capacity.
 To increase money supply: The RBI decreases SLR, allowing banks to lend
more.
 Repo and Reverse Repo Rates:
The rates at which the RBI lends money to or borrows money from commercial banks.
 To decrease money supply: The RBI raises the repo rate, making it more
expensive for banks to borrow money. It also raises the reverse repo rate to
encourage banks to hold more funds with the RBI.
 To increase money supply: The RBI lowers the repo rate, making borrowing
cheaper for banks, and lowers the reverse repo rate.
 Open Market Operations (OMO):
The buying and selling of government securities in the open market.
 To decrease money supply: The RBI sells government securities to the public
and banks. This removes cash from the market as people use their money to
buy the securities.
 To increase money supply: The RBI buys government securities from the
public and banks, injecting cash into the economy.
Qualitative tools
 Selective Credit Controls: The RBI can influence credit flow to specific sectors of
the economy by changing margin requirements for loans. For example, if the RBI
increases the margin requirement on loans for a specific commodity, it becomes
 more expensive for banks to lend money for that purpose, which can curb its
supply.

IV. Indian Tax Structure – Direct & Indirect Taxes

The Indian tax structure is a multi-tiered system where both the central and state
governments have the authority to levy and collect taxes. It is broadly divided into two
main categories: direct taxes and indirect taxes.
Direct taxes
These are taxes paid directly by individuals and organizations to the government. The
burden of the tax cannot be shifted to another person. The Central Board of Direct Taxes
(CBDT) governs and administers these taxes.
Key types of direct taxes include:
 Income Tax: Levied on the annual income of individuals, Hindu Undivided Families
(HUFs), and other entities. Tax rates are determined by progressive income tax
slabs, with higher incomes attracting higher tax rates.
 Corporate Tax: A tax charged on the income of domestic and foreign companies
operating in India.
 Capital Gains Tax: Applied to profits from the sale of capital assets like property,
stocks, and mutual funds. It is categorized into long-term and short-term capital
gains, each with different tax rates.
 Securities Transaction Tax (STT): A tax on the purchase and sale of securities
traded on Indian stock exchanges.
 Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT): Levied on
companies and Limited Liability Partnerships (LLPs) to ensure they pay a
minimum tax amount, regardless of exemptions.
Indirect taxes
These taxes are levied on goods and services, and the tax burden is passed on to the end
consumer by an intermediary, such as a retailer or service provider. The Central Board of
Indirect Taxes and Customs (CBIC) oversees indirect taxes.
The most significant indirect tax is the Goods and Services Tax (GST):
 Goods and Services Tax (GST): Implemented in 2017, the GST replaced multiple
central and state taxes like Value Added Tax (VAT), Service Tax, and Excise Duty to
create a unified tax system.
o CGST: Central GST is collected by the central government on intra-state
supplies of goods and services.
o SGST: State GST is collected by the state government on intra-state supplies.

o IGST: Integrated GST is collected by the central government on inter-state

supplies.
Federal tax structure
India has a dual taxation system with distinct taxing powers for different levels of
government.
Central Government Taxes:
 Income Tax
 Corporate Tax
 Central GST
 Integrated GST
 Customs Duty
 Central Excise Duty (on select products)
State Government Taxes:
 State GST
 Stamp Duty and Registration Fees
 Professional Tax
 State Excise Duty (on alcohol and petroleum products)
 Taxes on Agricultural Income
Local Body Taxes:
 Municipal bodies are also authorized to levy minor taxes, such as property tax and
water tax.
New vs. Old Income Tax Regimes
For individual taxpayers, India currently offers two income tax regimes. Taxpayers can
choose the one that is more beneficial for them.
 New Tax Regime (Default): This regime features lower tax rates but allows for fewer
exemptions and deductions. Incomes up to ₹12 lakh are effectively tax-free under
this regime due to an increased rebate, with a standard deduction of ₹75,000 for
salaried individuals raising the tax-free limit to ₹12.75 lakh.
 Old Tax Regime: This regime has higher tax rates but allows taxpayers to claim
various deductions and exemptions (e.g., under Section 80C and 80D) to reduce
their taxable income.

1. Direct Taxes
a) Income Tax
Paid by individuals, HUFs, firms.
Example: A lawyer earning ₹12 lakh pays tax as per slab.
b) Corporate Tax
Tax on company income.
Example: Infosys pays corporate tax on profits.
c) Wealth Tax
Abolished in 2015.

2. Indirect Taxes
a) Goods and Services Tax (GST)
A single tax on goods and services.
Example: Buying a mobile phone includes 18% GST.
b) Customs Duty
On imported goods.
Example: Importing an iPhone attracts customs duty.
c) Excise Duty
Earlier charged on production; now mostly under GST.

V. Sources of Public Revenue (With Examples)

a) Tax Revenue
 Income Tax
 GST
 Corporate Tax
Example: GST earned by the government helps fund welfare schemes.
b) Non-Tax Revenue
 Fees (passport fees)
 Fines (traffic penalties)
 Dividends from PSUs like LIC and ONGC.
c) Borrowings
Government borrows through:
 Treasury Bills
 Government Bonds
Example: India issued G-Secs to finance infrastructure projects.

VI. Public Expenditure – Classification & Causes of Growth

1. Classification
a) Revenue Expenditure
Does not create assets.
Examples:
 Salaries of police, judges
 Subsidies
 Defence maintenance
 Pensions
b) Capital Expenditure
Creates long-term assets.
Examples:
 Building highways
 Metro projects
 Defence equipment
 Hospitals and schools

2. Causes of Growth of Public Expenditure (With Examples)

a) Social Welfare Needs
Schemes increase expenditure.
Example: PM Awas Yojana, Mid-Day Meal Scheme.
b) Defence and Security
Border conflicts require higher spending.
Example: Purchasing Rafale jets.
c) Rising Subsidies
Fuel, fertilizer, food subsidies.
d) Interest Payments
Government debt leads to large interest payments.
e) Economic Development Programs
Infrastructure mega projects.
Example: Mumbai-Ahmedabad Bullet Train Project.

VII. Inter-Government Fiscal Relations

1. Centre–State Fiscal Relations
a) Tax Sharing
Based on Finance Commission recommendations.
Example: 15th Finance Commission fixed 41% share of central taxes for states.
b) Grants-in-Aid
Given for:
  Disaster relief
 Education
 Health missions
Example: Grants to states during COVID-19.

2. Finance Commission (Examples)

The Finance Commission:
 Reviews Centre-State finances
 Recommends tax distribution
 Suggests fiscal reforms
Example: The 15th Finance Commission (2021–26) recommended:
 ₹1 lakh crore health sector grants
 Disaster risk mitigation funds

Conclusion
The Indian economy functions through a structured network of money markets, capital markets,
taxation systems, and public expenditure policies. Each component is legally regulated—RBI
governs banking and money markets, SEBI supervises capital markets, and Parliament frames
tax laws. These mechanisms ensure economic stability, financial discipline, and equitable
development across the country. The growing public expenditure, increasing financial
participation, and Centre-State fiscal cooperation (managed by the Finance Commission) reflect
India's expanding economic priorities. For law students, understanding these components is
essential, as they form the basis of economic legislation, policy-making, and public finance
management.