Money and Capital Market: Money market, capital market and exchanges

Under SEBI's framework of 2001, market-wide circuit breakers are triggered when either the Sensex or the Nifty 50 moves by 10, 15 or 20 per cent, whichever index breaches the level first. A trigger halts trading in all equity and equity derivative markets across the country; the length of the halt depends on the level and the time of day, and at 20 per cent trading stops for the rest of the day. Trading resumes through a pre-open call auction. Separate price bands apply to individual stocks, while the India VIX and FPI flows are indicators, not triggers.

On 5 November 2018 the Clearing Corporation of India Ltd (CCIL) discontinued CBLO and launched triparty repo. In a triparty repo, a third entity, the triparty agent, handles collateral selection, settlement and custody for the borrower and the lender. On TREPS, an anonymous order-matching system of CCIL's subsidiary Clearcorp, members borrow and lend funds against Government securities, and CCIL is the central counterparty to every trade. It is a key money market segment where mutual funds, banks and others deploy or raise overnight and short-term funds.

Statements 1 and 3 are correct. The Depositories Act, 1996 allowed securities to be held and transferred as electronic book entries; NSDL began operations in 1996, and CDSL, promoted by BSE, followed in 1999. Under regulation 40 of the SEBI (LODR) Regulations, transfers of listed securities other than transmission or transposition must be in demat form from 1 April 2019. Statement 2 is wrong: an investor does not deal with NSDL or CDSL directly but opens an account with a depository participant (DP), such as a bank or stock broker registered with SEBI, which acts as the depository's agent.

India VIX is a volatility index built from the best bid and ask quotes of near-month and next-month Nifty 50 options. It expresses, as an annualised percentage, the volatility that the options market expects over the next 30 calendar days, which is why it is called a 'fear gauge': it tends to rise when markets fall sharply or uncertainty grows. It is forward-looking, unlike historical volatility, and it concerns the equity index, not currency or turnover ratios.

Statements 1 and 3 are correct. The Sensex, launched in 1986, tracks 30 large, liquid stocks listed on BSE, with 1978-79 = 100 as its base. Both the Sensex (since 2003) and the Nifty 50 (since 2009) are computed on the free-float market capitalisation method, which counts only shares available for trading and leaves out promoter and other locked-in holdings. Statement 2 is wrong: the Nifty 50 belongs to the National Stock Exchange and is maintained by its index subsidiary, NSE Indices Ltd; its base is 3 November 1995 = 1,000.

Statements 1 and 2 are correct. SEBI allowed exchanges to move to T+1 in phases from February 2022, and the move was fully implemented on 27 January 2023, making India one of the first large markets with next-day settlement. SEBI then launched an optional beta version of T+0 (same-day) settlement from 28 March 2024 for 25 scrips and a limited set of brokers, running alongside T+1. Statement 3 is wrong: in T+1, 'T' is the trade day and settlement of funds and shares takes place on the next working day; same-day settlement is T+0.

Three statements are correct. Short selling means selling a stock one does not own at the time of the trade. SEBI's circular of 5 January 2024 confirms that all classes of investors may short sell, that naked short selling is not allowed and every seller must deliver securities on settlement (borrowing them through the securities lending and borrowing scheme if needed), and that institutional investors must disclose a short sale upfront, while retail investors may disclose it by the end of the trading day. Statement 4 is wrong: only securities traded in the F&O segment are eligible for short selling, and SEBI may review this list.

Statements 1 and 2 are correct. A clearing corporation acts as central counterparty: through novation it steps between the two sides of each trade, so each party faces the clearing corporation rather than an unknown counterparty, and settlement is guaranteed even if one side fails. SEBI requires each clearing corporation to maintain a Core Settlement Guarantee Fund, built from contributions of the clearing corporation, the exchange and members, to cover defaults. Statement 3 is wrong: clearing and settlement are done by separate SEBI-recognised clearing corporations such as NSE Clearing Ltd and Indian Clearing Corporation Ltd (for BSE), not by the exchanges' trading arms.

CBLO was a money market instrument (c). Collateralised Borrowing and Lending Obligation (CBLO) was a short-term borrowing tool run by the Clearing Corporation of India (CCIL), using government securities as collateral, for periods from one day up to a year. Anything that lends and borrows for up to one year belongs to the money market. Option (a) is wrong: the bond market deals in long-term debt. Option (b) is wrong: the forex market deals in currencies. Option (d) is wrong: the stock market deals in shares.

Notice that CBLO was replaced in 2018 by TREPS (tri-party repo), which works the same way and is now the largest part of India's money market. Mutual funds and banks use it to park spare cash.

Answer as per the official UPSC answer key.

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Two of them belong to the capital market (b). The capital market deals in long-term funds, over one year. It includes the stock market (item 4), where shares are traded, and the government bond market (item 1), where long-dated bonds are bought and sold. The money market deals in funds for up to one year. Item 2 is wrong: call money is borrowing between banks for one day, up to 14 days for notice money. Item 3 is wrong: Treasury Bills are short-term government papers of 91, 182 and 364 days.

Notice the regulators: SEBI watches the capital market, while the RBI looks after the money market and government securities. Commercial paper and certificates of deposit are other money market tools.

Answer as per the official UPSC answer key.

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