UPSC Prelims 2023 Q25: Indian Economy – Financial Markets & Capital Markets
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?
- (a) Only one
- (b) Only two
- (c) Only three
- (d) All four
Answer: (b) Only two
Explanation
Capital market vs money market
| Market | Time horizon | Instruments |
|---|---|---|
| Capital market | Long term (over 1 year) | Shares, government bonds, corporate debentures |
| Money market | Short term (up to 1 year) | Call money, Treasury bills, commercial paper, certificates of deposit |
Checking the four markets:
| Market | Capital market? |
|---|---|
| 1. Government Bond Market | Yes — dated G-Secs run 5 to 40 years |
| 2. Call Money Market | No — overnight to 14 days, a money-market tool |
| 3. Treasury Bill Market | No — 91, 182 and 364 days, a money-market tool |
| 4. Stock Market | Yes — shares are long-term capital |
Answer: (b) Only two.
Why each option is right or wrong
- (a) Incorrect. Both the bond market and the stock market are part of the capital market.
- (b) CORRECT. Government bonds and stocks are capital-market instruments; call money and T-bills are money market.
- (c) Incorrect. Three would wrongly include T-bills or call money, which mature within a year.
- (d) Incorrect. Call money and Treasury bills are short-term money-market instruments.
Key point
Capital market = long-term (shares, bonds); money market = up to one year (call money, T-bills, CP, CDs).
Remember
Bonds and stocks are capital market; call money and T-bills are money market.
Common mistakes
- Treating Treasury bills as capital market because they are government securities; they mature within a year.
- Thinking 'government' means money market; dated G-Secs are long-term capital-market instruments.
- Forgetting that call money is overnight lending between banks.
Exam tip
One-year line: under a year is money market, over a year is capital market.
Sources
- RBI — Money market instruments (FAQs)
- NCERT Class XII — Business Studies, Ch 10 (Financial Markets)