Indian Financial Market — Where Savings Meet Investment

The financial market is the plumbing that channels household savings into productive investment. It splits into the money market (short-term funds, <1 year, RBI's turf) and the capital market (long-term funds, >1 year, SEBI's turf), served by a web of institutions (banks, NBFCs), instruments (T-bills, CPs, shares, bonds) and regulators (RBI, SEBI, IRDAI, PFRDA). This topic builds the map of the system, its regulators, the NBFC/shadow-banking layer, the financial-inclusion mission and the fintech/digital-finance revolution — the foundation on which Banking (Ch. 13), Insurance (Ch. 14) and the Security Market (Ch. 15) sit.

UPSC Prelims · Mains GS-III Ramesh Singh Ch. 12 ~30 min read Money vs Capital Market RBI · SEBI · NBFC

Conceptual Clarity
1. Structure of the Indian Financial System
2. Money Market vs Capital Market
3. Money Market Instruments
4. Financial Regulators — RBI, SEBI, IRDAI, PFRDA
5. NBFCs & Shadow Banking
6. Financial Inclusion
7. Financial-Sector Reforms
8. Digital Finance & Fintech
9. Current Affairs Anchor (2024-26)
10. Prelims PYQs (2014–2026)
11. Mains PYQs (2014–2025)
12. Revision Box

Conceptual Clarity — Three Lenses

Intermediation — turning savings into investment: the financial market's core job is to move surplus funds (savers) to deficit units (borrowers/firms) efficiently, cheaply & safely. Every institution & instrument exists to reduce the cost, risk or information gap in this transfer.
Maturity as the dividing line: money market = short-term (<1 year) liquidity management; capital market = long-term (>1 year) capital formation. This maturity split also maps to regulators — RBI dominates the money market, SEBI the capital market.
Bank-dominated vs market-based: India's system is still bank-led; a deeper, diversified financial market (bonds, equity, NBFCs, fintech) spreads risk, widens access & funds long-gestation projects that banks alone cannot.

Money Market: maturity < 1 year · regulated mainly by RBI · instruments: Call money, T-bills, CPs, CDs
Capital Market: maturity > 1 year · regulated by SEBI · instruments: shares, debentures, bonds
Four pillars of a financial system: Institutions · Markets · Instruments · Regulators

1. Structure of the Indian Financial System

1.1 Four Components

Financial Institutions — banks, NBFCs, insurance companies, mutual funds, pension funds, development finance institutions (DFIs).
Financial Markets — money market (short-term) & capital market (long-term); plus forex & commodity markets.
Financial Instruments — the "products" traded: deposits, loans, T-bills, commercial paper, shares, bonds, derivatives.
Financial Regulators — RBI, SEBI, IRDAI, PFRDA (plus the umbrella FSDC for coordination).

1.2 Organised vs Unorganised

Segment	Composition
Organised (formal)	RBI, scheduled banks, NBFCs, SEBI-regulated markets — supervised, transparent, rule-bound
Unorganised (informal)	Moneylenders, indigenous bankers, chit funds, unregistered lenders — outside direct regulation; still significant in rural credit

Mains anchor: Shrinking the unorganised segment — via financial inclusion, JAM & digital lending — is a development goal: informal credit is costlier, exploitative & excludes the poor from formal-sector benefits (insurance, credit history, DBT).

2. Money Market vs Capital Market

Feature	Money Market	Capital Market
Maturity	Short-term (< 1 year)	Long-term (> 1 year, incl. perpetual equity)
Purpose	Liquidity & short-term fund management	Capital formation for long-term investment
Chief regulator	RBI	SEBI
Instruments	Call money, T-bills, CPs, CDs, repo	Equity shares, debentures, bonds
Risk / Return	Low risk, low return, highly liquid	Higher risk, higher return, less liquid
Participants	Banks, RBI, financial institutions, corporates	Companies, retail & institutional investors, FPIs

Prelims trap: Maturity, not the amount, is the dividing line — a 6-month corporate borrowing is a money-market transaction; a 10-year corporate bond is a capital-market one. The money market is regulated chiefly by RBI, the capital market by SEBI.

3. Money Market Instruments

Instrument	Description
Call / Notice Money	Very short-term interbank borrowing — "call" = 1 day, "notice" = 2-14 days; the rate is the call money rate
Treasury Bills (T-bills)	Short-term (91, 182, 364-day) government borrowing; issued at a discount, redeemed at face value; zero default risk; no separate interest (return = discount)
Commercial Paper (CP)	Unsecured short-term promissory note issued by highly-rated corporates to raise working capital
Certificate of Deposit (CD)	Short-term negotiable instrument issued by banks/financial institutions against deposits
Cash Management Bills (CMBs)	Very short-tenor government instrument (< 91 days) for temporary cash-flow mismatches
Repo / Reverse Repo	Sale-and-repurchase of securities for short-term liquidity; RBI's key money-market operation

Prelims trap: Treasury Bills are issued only by the Central Government (via RBI), always at a discount with no coupon — the return is the gap between issue price and face value. Commercial Paper is issued by corporates and is unsecured.

3.1 Government Securities (G-Secs) Market

The market for tradable central/state government debt — T-bills (short-term) & dated securities (long-term). Managed by RBI as the government's debt manager; the RBI Retail Direct scheme now lets individuals buy G-Secs directly. G-Secs are the benchmark "risk-free" rate anchoring all other pricing.

4. Financial Regulators — RBI, SEBI, IRDAI, PFRDA

Regulator	Established	Domain
RBI	1935	Banks, NBFCs, money market, G-Sec, forex, payment systems, monetary policy
SEBI	1992 (Act)	Securities/capital market — exchanges, mutual funds, intermediaries
IRDAI	1999	Insurance (life & non-life)
PFRDA	2013 (statutory)	Pension — NPS & Atal Pension Yojana
IBBI	2016	Insolvency professionals & the resolution process

4.1 Financial Stability & Development Council (FSDC)

An apex, non-statutory coordination body (2010), chaired by the Union Finance Minister, bringing together all financial-sector regulators (RBI Governor, SEBI, IRDAI, PFRDA chiefs). It addresses inter-regulatory coordination, systemic risk & financial stability — created after the 2008 crisis exposed regulatory-turf gaps.

Prelims trap: FSDC is chaired by the Finance Minister (not the RBI Governor) and is a coordination council, not a super-regulator — it does not override the individual regulators' statutory powers.

5. NBFCs & Shadow Banking

5.1 What NBFCs Are

Companies registered under the Companies Act, engaged in lending/investment activities, but which cannot accept demand deposits (like savings/current accounts) & are not part of the payment/settlement system directly. Regulated by RBI, historically with a lighter touch than banks — hence the "shadow banking" label for their bank-like credit intermediation outside full bank regulation.

5.2 Scale-Based Regulation (2021)

After the IL&FS (2018) & DHFL defaults exposed systemic risk from NBFC asset-liability mismatches, RBI introduced a four-layered Scale-Based Regulation (SBR) aligning supervisory intensity with systemic risk:

Layer	Coverage
Base Layer (NBFC-BL)	Smallest, non-deposit-taking NBFCs; lightest regulation
Middle Layer (NBFC-ML)	Deposit-taking NBFCs & larger non-deposit NBFCs
Upper Layer (NBFC-UL)	Systemically significant NBFCs (identified by RBI); bank-like regulatory intensity
Top Layer (NBFC-TL)	Reserved for highest-systemic-risk NBFCs (currently empty, activated only if warranted)

Prelims trap: NBFCs cannot accept demand deposits — but a subset of deposit-taking NBFCs can accept term/fixed deposits under RBI conditions; don't assume all NBFCs are deposit-free. Also: NBFCs are not covered by DICGC deposit insurance.

6. Financial Inclusion

6.1 The Concept

Financial inclusion = ensuring access to affordable, formal financial services (savings, credit, insurance, pension, payments) for all, especially the poor & unbanked. It is both a growth enabler (mobilising savings) & an equity goal (breaking dependence on exploitative informal credit).

6.2 Key Pillars

PMJDY (2014) — universal zero-balance bank accounts with RuPay card, insurance cover & overdraft; foundation of the JAM Trinity (Jan Dhan-Aadhaar-Mobile) that powers Direct Benefit Transfer.
Differentiated banks (2015) — Payment Banks (deposits/payments, no lending) & Small Finance Banks (full lending to underserved segments).
FI-Index — RBI's annual composite Financial Inclusion Index (since 2021) measuring access, usage & quality. check for latest update or data
Priority Sector Lending (PSL) — RBI mandate directing a share of bank credit to agriculture, MSMEs, weaker sections, education & housing.

Prelims trap: Payment Banks cannot lend or issue credit cards and cap deposits (currently ₹2 lakh/customer); Small Finance Banks have full lending powers — the defining regulatory line between the two 2015 differentiated-bank categories.

7. Financial-Sector Reforms

Narasimham Committees (1991, 1998) — blueprint for prudential norms, reduced SLR/CRR, new private banks & asset-classification standards.
Prudential norms & Basel adoption — income recognition, asset classification & capital-adequacy (CRAR) requirements aligning Indian banks with global Basel standards.
Insolvency & Bankruptcy Code (2016) — time-bound, creditor-in-control resolution of stressed assets (detailed in Banking, Ch. 13).
Financial market infrastructure — electronic trading, demat, G-Sec/repo platforms, and moves toward a unified regulatory architecture.
Deepening non-bank finance — developing the corporate bond market, InvITs/REITs & pension/insurance long-term capital to diversify beyond bank credit.

Mains anchor: The reform arc moves from a directed, bank-dominated system (pre-1991) toward a diversified, market-based, prudentially-regulated one — balancing efficiency & competition with financial stability & inclusion.

8. Digital Finance & Fintech

8.1 Digital Payment Rails

India's payment ecosystem — built on the India Stack / Digital Public Infrastructure — includes UPI (real-time, NPCI-operated, world-leading in volume), IMPS, NEFT/RTGS (now 24×7) & the Bharat Bill Payment System (BBPS).

8.2 Fintech Regulatory Innovations

Regulatory Sandbox — RBI's controlled environment for fintechs to trial products before full rollout.
Account Aggregator framework — consent-based, secure financial-data sharing enabling faster credit underwriting.
Digital Lending Guidelines (2022) — curb predatory lending apps; mandate direct disbursal to borrower accounts & transparent fee disclosure.
CBDC — e₹ (Digital Rupee) — RBI's sovereign digital currency (wholesale & retail pilots), legal tender, distinct from private cryptocurrencies. check for latest update or data

Prelims trap: The CBDC (e₹) is a sovereign, RBI-issued digital currency with legal-tender status — fundamentally different from private cryptocurrencies (Bitcoin etc.), which are not legal tender in India and sit outside RBI's currency framework.

8.3 Crypto, CBDC & Virtual Digital Assets (VDAs)

VDA — the Income-Tax Act (amended 2022) defines Virtual Digital Assets broadly to cover cryptocurrencies & NFTs, generated by cryptographic means; the definition enables taxation without recognising them as "currency" or legal tender.
Blockchain / DLT — a decentralised, tamper-evident distributed ledger; underpins crypto, smart contracts (Ethereum) & DeFi; also usable for CBDC & record-keeping.
India's regulatory journey — RBI's 2018 banking-access ban was struck down by the Supreme Court in IAMAI v. RBI (March 2020); India then chose "regulate, don't ban" via heavy taxation & AML cover.
VDA taxation (Budget 2022-23) — flat 30% tax on VDA income (Sec 115BBH) + 1% TDS (Sec 194S); no loss set-off or carry-forward.
PMLA cover (March 2023) — VDA service providers brought under the Prevention of Money Laundering Act; KYC & reporting to FIU-IND, aligned with FATF AML/CFT standards.
CBDC (Digital Rupee, e₹) — wholesale pilot (e₹-W, Nov 2022, G-Sec settlement) & retail pilot (e₹-R, Dec 2022, token-based); a direct RBI liability with offline & programmability potential. check for latest update or data
Global comparison — EU's MiCA (comprehensive crypto framework), the US's evolving case-by-case approach, China's outright ban; India's G20 (2023) push backed the IMF-FSB Synthesis Paper for coordinated global crypto rules.

Recurring exam angle: CBDC = sovereign digital currency (RBI liability, legal tender); crypto/VDA = private asset (30% tax, not legal tender, not banned); retail CBDC (e₹-R) is digital cash for the public, wholesale (e₹-W) is for interbank settlement.

9. Current Affairs Anchor (2024-26)

UPI transaction-volume records & global UPI linkages (cross-border) check for latest update or data
e₹ (CBDC) pilot expansion — retail/wholesale volumes check for latest update or data
RBI Financial Inclusion Index (FI-Index) latest reading check for latest update or data
NBFC Scale-Based Regulation tightening & RBI action on select NBFCs check for latest update or data
Corporate bond market deepening & RBI Retail Direct uptake check for latest update or data
Digital-lending & fintech-governance norms check for latest update or data
India's inclusion in global bond indices & FPI debt flows check for latest update or data

Note: Financial-market data (UPI volumes, CBDC pilots, FI-Index, FPI flows) move quickly — cross-check the latest RBI/NPCI/SEBI releases before the exam.

10. Prelims PYQs (2014–2026)

UPSC CSE 2023

With reference to the Indian economy, consider the statements about "Treasury Bills (T-bills)".
Answer: T-bills are short-term (91/182/364-day) instruments issued by the Central Government at a discount to face value; they carry zero default risk and pay no separate interest — the return is the discount.

UPSC CSE 2022

Consider the statements regarding the RBI's Scale-Based Regulation (SBR) framework for NBFCs.
Answer: A four-layered structure (Base, Middle, Upper, Top) calibrating supervisory intensity to each NBFC's systemic risk; introduced after IL&FS/DHFL episodes.

UPSC CSE 2021

With reference to "Commercial Paper" and "Certificate of Deposit", consider who can issue them.
Answer: Commercial Paper is an unsecured short-term promissory note issued by highly-rated corporates; Certificate of Deposit is a negotiable instrument issued by banks/financial institutions — both are money-market instruments.

UPSC CSE 2020

Consider the statements about the differences between "money market" and "capital market" instruments.
Answer: Money-market instruments (call money, T-bills, CP, CD) are short-term (<1 yr, RBI-regulated); capital-market instruments (shares, bonds) are long-term (>1 yr, SEBI-regulated).

UPSC CSE 2019

Consider the statements about Payment Banks in India.
Answer: Payment Banks can accept capped deposits & offer payment/remittance services but cannot lend or issue credit cards — a differentiated-bank category (2015 licences).

UPSC CSE 2018

Non-Banking Financial Companies (NBFCs) differ from scheduled commercial banks in which way?
Answer: NBFCs cannot accept demand deposits, are not part of the payment-settlement system, and their deposits are not covered by DICGC deposit insurance.

UPSC CSE 2017

With reference to the Financial Stability and Development Council (FSDC), consider its composition.
Answer: An apex coordination council chaired by the Union Finance Minister, comprising the heads of RBI, SEBI, IRDAI & PFRDA; addresses systemic risk & inter-regulatory coordination — not a super-regulator.

UPSC CSE 2015

With reference to Pradhan Mantri Jan-Dhan Yojana (PMJDY), consider its financial-inclusion features.
Answer: Provides zero-balance accounts, RuPay debit card, accident/life-insurance cover & overdraft; forms the base of the JAM Trinity enabling Direct Benefit Transfer.

11. Mains PYQs (2014–2025)

GS-III 2021

Do you agree that steady GDP growth & low inflation are necessary but not sufficient for a nation's development? Give reasons in the context of financial-sector deepening.
Answer: Argue that broad-based development also needs financial deepening — inclusion (Jan Dhan), diversified markets, credit access for MSMEs & the poor — so growth translates into welfare, not just aggregate GDP.

GS-III 2019

"There is a need to diversify India's bank-dominated financial system." Critically examine with reference to NBFCs & capital markets.
Answer: Weigh benefits of NBFC/market diversification (wider access, risk-spreading, long-term funds) against systemic-risk lessons (IL&FS); argue for calibrated Scale-Based Regulation & deeper bond markets.

GS-III 2018

Discuss the role of digital financial services & the JAM trinity in advancing financial inclusion in India.
Answer: Link Jan Dhan accounts + Aadhaar authentication + mobile penetration to DBT leakage reduction, UPI-led payments & credit access; flag challenges of digital literacy, connectivity & account dormancy.

GS-III 2016

Examine the role of the money market & its instruments in the RBI's liquidity management.
Answer: Explain how call money, T-bills, repo/reverse-repo & OMOs let RBI absorb/inject short-term liquidity to steer the operating rate toward the policy repo rate; link to inflation-targeting.

GS-III 2015

Financial inclusion is a prerequisite for inclusive growth. Discuss the measures taken by India & the challenges that remain.
Answer: Cover PMJDY, differentiated banks, PSL, FI-Index & digital finance; challenges — dormancy, last-mile access, informal-credit persistence & digital-divide.

12. Revision Box — 15-Point Crisp Recap

Financial system = four pillars: Institutions + Markets + Instruments + Regulators.
Organised (RBI/banks/SEBI markets) vs Unorganised (moneylenders, chit funds).
Money market = short-term (<1 yr), RBI-regulated; capital market = long-term (>1 yr), SEBI-regulated.
Money-market instruments: Call/Notice money, T-bills, Commercial Paper, Certificate of Deposit, CMBs, Repo.
T-bills = Central Govt, issued at discount, no coupon, 91/182/364-day; CP = corporate, unsecured.
G-Secs = tradable govt debt; RBI is debt manager; RBI Retail Direct lets individuals buy.
Regulators: RBI (banks/NBFC/money mkt), SEBI (capital mkt), IRDAI (insurance), PFRDA (pension), IBBI (insolvency).
FSDC = apex coordination council, chaired by Finance Minister, not a super-regulator.
NBFCs = no demand deposits, no DICGC cover, RBI-regulated; "shadow banking".
NBFC Scale-Based Regulation (2021): Base → Middle → Upper → Top, post-IL&FS.
Financial inclusion pillars: PMJDY (2014), JAM trinity, differentiated banks, PSL, FI-Index.
Payment Banks (no lending) vs Small Finance Banks (full lending), both 2015 licences.
Reforms: Narasimham (1991/98), prudential/Basel norms, IBC (2016), market-deepening.
Digital rails: UPI, IMPS, NEFT/RTGS (24×7), BBPS on India Stack/DPI.
e₹ (CBDC) = sovereign RBI legal tender, distinct from private crypto.

Regulator	Domain
RBI	Banks, NBFC, money market, G-Sec
SEBI	Securities/capital market
IRDAI	Insurance
PFRDA	Pension (NPS/APY)
FSDC	Coordination (FM-chaired)

	Money	Capital
Maturity	<1 yr	>1 yr
Regulator	RBI	SEBI
Risk	Low	Higher
Liquidity	High	Lower

Indian Financial Market — Where Savings Meet Investment

On this page

Conceptual Clarity — Three Lenses

1. Structure of the Indian Financial System

1.1 Four Components

1.2 Organised vs Unorganised

2. Money Market vs Capital Market

3. Money Market Instruments

3.1 Government Securities (G-Secs) Market

4. Financial Regulators — RBI, SEBI, IRDAI, PFRDA

4.1 Financial Stability & Development Council (FSDC)

5. NBFCs & Shadow Banking

5.1 What NBFCs Are

5.2 Scale-Based Regulation (2021)

6. Financial Inclusion

6.1 The Concept

6.2 Key Pillars

7. Financial-Sector Reforms

8. Digital Finance & Fintech

8.1 Digital Payment Rails

8.2 Fintech Regulatory Innovations

8.3 Crypto, CBDC & Virtual Digital Assets (VDAs)

9. Current Affairs Anchor (2024-26)

10. Prelims PYQs (2014–2026)

11. Mains PYQs (2014–2025)

12. Revision Box — 15-Point Crisp Recap