Question map
Consider the following markets : 1. Government Bond Market 2. Call Money Market 3. Treasury Bill Market 4. Stock Market How many of the above are included in capital markets?
Explanation
The correct answer is Option 2 (Only two). The Indian financial market is broadly divided into the Money Market and the Capital Market based on the maturity period of the instruments traded.
- Capital Markets deal with long-term funds (maturity exceeding one year). In this question, the Government Bond Market (Gilt-edged market) and the Stock Market (Equity/Secondary market) fall under this category as they facilitate long-term capital formation.
- Money Markets deal with short-term funds (maturity up to one year). The Call Money Market (inter-bank overnight lending) and the Treasury Bill Market (short-term sovereign debt instruments issued for 91, 182, or 364 days) are integral components of the money market.
Therefore, since only the Government Bond Market and the Stock Market are capital market components, the count is two. Options 1, 3, and 4 are incorrect because they either undercount or misidentify short-term money market instruments as capital market entities.
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Taxonomy' question found in every standard Economy textbook (NCERT/Singh/Singhania). The core competency tested is simply distinguishing between 'Money Market' (short-term, <1 year) and 'Capital Market' (long-term, >1 year). No current affairs required; this is static theory.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Explicitly states the government raises funds through Government Bonds/Dated Government Securities as participation in the capital market.
- Directly defines capital markets as including debt (bonds, debentures) as well as equity.
- Describes the Government Securities Market managed by the RBI for issuing government securities (primary issuance).
- Specifically notes Treasury Bills, Dated Securities and State Development Loans are also traded in the Capital Market like BSE/NSE (secondary trading).
- Defines capital market as the financial market for buying and selling debt and equity securities.
- Frames capital market as the venue for medium- and long-term securities, which covers government bonds.
- Explicitly classifies Call/Notice money as a money market instrument.
- Groups call money with other short-term, highly liquid instruments (T-bills, CP, CDs), distinguishing it from long-term instruments.
- Defines call money as an inter-bank market where funds borrowed for 1 day are called call money and 2–14 days as notice money.
- Emphasises the very short-term tenor characteristic of call/notice money.
- Defines capital markets as catering to long-term funds with periods of investment generally more than 1 year.
- By contrasting tenors, implies short-term call money does not belong to capital markets.
- Explicitly states that capital markets include the money market.
- Directly lists Treasury bills as a money market instrument, linking T-bills to capital markets.
- Specifies that Treasury bills are cash instruments traded in the money market.
- Supports the identification of Treasury bills as part of the broader money-market segment cited as within capital markets.
Defines money market as the segment where very short‑maturity (less than one year) instruments are traded and explicitly lists Treasury Bills as a money market instrument.
A student could use the <1 year maturity rule to infer that T‑bills belong to money markets rather than capital markets (which cater to longer maturities).
Explains Treasury Bills are short‑term (<1 year), zero‑coupon government instruments and states 'Treasury bills are traded in money market.'
Combine this statement with the standard capital‑market definition of longer maturities to judge whether a T‑bill market is normally classed as capital market.
Gives a general definition of capital markets as channels for long‑term funds and says capital markets generally involve investment periods of more than one year.
Use the >1 year characteristic to contrast with T‑bills' short tenor and test whether T‑bill markets fit the capital‑market definition.
Summarizes that the financial market comprises Money Market and Capital Market and notes money market trades highly liquid short‑term assets up to 1 year.
A student can apply this classification rule (money vs capital by maturity) to place Treasury Bills in the appropriate segment.
States all four types of government securities including Treasury Bills are traded in the Government Securities Market and additionally notes Treasury Bills (and some dated securities) are also traded in capital market venues like BSE/NSE.
Treats as an example that, despite being money‑market instruments, T‑bills may also be traded on exchanges—so a student should distinguish where instruments are primarily classified (by maturity) versus where they can be listed/traded.
- Defines capital markets as including both debt (bonds, debentures) and equity (shares).
- Since stock markets trade equity (shares), this places stock markets within capital markets.
- Describes capital market as financial markets for buying and selling debt and equity securities such as stocks.
- Explicitly links stocks (equity) to capital market activity, covering medium- and long-term securities.
- Explains primary and secondary markets; secondary market is where constant buying and selling of securities take place.
- The stock market functions as the secondary market for equities, reinforcing its inclusion in capital markets.
- [THE VERDICT]: Sitter. Directly solvable from the 'Financial Markets' chapter of any standard book (e.g., Vivek Singh Ch. 2 or Singhania Ch. 9).
- [THE CONCEPTUAL TRIGGER]: Structure of the Indian Financial System > Classification of Markets based on Maturity (Tenor).
- [THE HORIZONTAL EXPANSION]: Memorize the bucket list. Money Market (<1 yr): Call/Notice Money, Treasury Bills (91, 182, 364 days), Cash Management Bills (<91 days), Commercial Paper (CP), Certificate of Deposit (CD). Capital Market (>1 yr/Equity): Dated G-Secs, State Development Loans (SDLs), Shares, Debentures, Municipal Bonds.
- [THE STRATEGIC METACOGNITION]: Do not just read definitions; visualize the 'Maturity Line'. Draw a timeline at 365 days. Anything that matures before this line is Money Market (T-Bills, Call Money). Anything crossing it is Capital Market (Bonds, Stocks). This binary filter solves the question instantly.
Capital markets comprise both debt instruments (bonds) and equity; government bonds are a category of debt instruments within the capital market.
High-yield for questions on financial markets and public finance because it lets aspirants classify instruments (bonds vs shares), link them to market segments, and reason about funding sources and investor choice; connects to topics like capital formation, securities regulation and market structure.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > CAPITAL MARKET > p. 261
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 50
Government securities are debt instruments issued to raise public funds and can be traded, serving both financing and regulatory functions (e.g., SLR eligibility).
Essential for questions on fiscal management and RBI operations: explains how governments borrow domestically, how bonds interact with banking regulation (SLR), and implications for crowding out/in; links public debt, monetary policy and capital markets.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Govt. Securities Market: > p. 47
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Bonds > p. 264
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Inflation Indexed Bond > p. 265
Government securities are issued in the primary market (RBI-managed issuance) and subsequently traded in secondary markets, including stock exchanges.
Useful for answering questions on market functioning, liquidity and investor access; helps analyze reforms (e.g., bond index inclusion), market infrastructure and implications for investors and government borrowing costs.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Govt. Securities Market: > p. 47
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 50
Money market trades short-term instruments (up to 1 year) while capital market serves long-term finance (generally more than 1 year).
High-yield for UPSC: many economy questions hinge on distinguishing short-term and long-term financial markets, their instruments and policy implications. Links to banking, public finance and monetary policy topics and helps answer questions on market segmentation and instrument suitability.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > MONEY MARKET > p. 258
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > CAPITAL MARKET > p. 261
Call money is an overnight inter-bank borrowing market and notice money covers 2–14 day borrowings.
Important for questions on liquidity management and inter-bank rates; explains how short-term funding is secured among banks and how volatile call rates reflect demand-supply. Connects to RBI operations, liquidity policy and short-term interest rate transmission.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Call Money > p. 259
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 50
Call/Notice money is listed alongside repos, T-bills, commercial paper, certificates of deposit and CBLO as money market instruments.
Useful for quick recall in economy questions: identifying instruments, their issuers and tenors aids in policy, regulation and market-structure questions. Enables comparison with capital-market instruments like bonds and equity.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 50
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 51
Separates short-term, highly liquid instruments from longer-term instruments — central to classifying Treasury Bills.
High-yield for UPSC because many questions test where instruments (T-bills, commercial paper, bonds) belong and why; links to monetary policy, liquidity, and financial stability topics; enables answering comparison and classification questions on financial markets.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 50
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > CHAPTER SUMMARY > p. 283
Since they asked about T-Bills and Call Money, the next logical question is on 'Commercial Paper vs. Certificate of Deposit'. Key difference: CDs are issued by Banks (min ₹1 lakh), CPs are issued by Corporates (min ₹5 lakh). Also, watch out for 'Cash Management Bills' (CMBs) which are like T-Bills but for <91 days.
The '365-Day Razor'. Apply this logic: Does the instrument survive for more than a year?
- Call Money (1-14 days) -> Dies < 1 yr -> Money Market.
- T-Bills (Max 364 days) -> Dies < 1 yr -> Money Market.
- Bonds/Stocks -> Long term/Perpetual -> Capital Market.
Result: Only two fit the Capital Market criteria.
Mains GS-3 (Mobilization of Resources): A developed 'Corporate Bond Market' (Capital Market) is critical to solve the 'Asset-Liability Mismatch' in banks. Banks have short-term liabilities (deposits) but lend for long-term infra projects; shifting infra financing to the Bond Market reduces systemic risk.