Part 1 — Financial Market | Monetary Policy | RBI

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Chapter 1: Financial Market

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1.1 SEBI — Structure & Functioning

Securities Markets Code Bill 2025 (not yet passed)

• Seeks to repeal and replace: (i) Securities Contracts (Regulations) Act, 1956, (ii) SEBI Act, 1992, and (iii) Depositories Act, 1996
• Increase number of SEBI members from 9 to 11

SEBI SWAGAT-FI framework — framework to give verified low-risk foreign investors a single-window, streamlined route to access Indian securities markets.

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1.2 Market Infrastructure Institutions (MIIs)

Entities that provide the core infrastructure for securities market to function — regulated by SEBI.

BSE — Oldest stock exchange in Asia (est. 1875). Benchmark: SENSEX (30 companies). Trading platform: BOLT. NSE — Est. 1992. Benchmark: NIFTY 50 (50 companies). Trading platform: NEAT. NSDL — Est. 1996, promoted by NSE + IDBI + HDFC + UTI. CDSL — Est. 1999, promoted by BSE + HDFC + LIC. Both regulated by SEBI under Depositories Act 1996.

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1.3 Money Market vs Capital Market

Key Money Market Instruments:

• T-Bill — unsecured, sold at discount-repurchased at face value, negotiable, tradable. State govt can't issue T-Bill and CMB.
• Ways and Means Advances (WMA) — short-term loans by RBI to Centre/State govts for temporary mismatches.
• Call Money — Overnight interbank borrowing, unsecured. Notice Money — 2–14 days.
• Certificate of Deposit (CoD) — Fixed-term deposit issued by banks in marketable form, at discount.
• Factoring — Sale of trade receivables to a factor at discount. Governed by Factoring Regulation Act 2011. Done on TReDS platform (RBI-licensed).

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1.4 Bond Concepts

Long-term Govt Debt:

• G-Sec — backed by sovereign guarantee, called gilt-edged securities. State govt: SDL. Both = "Dated securities".
• Sovereign Gold Bond (SGB) — bond price linked to gold rate. Issued by RBI on behalf of govt.
• Inflation Indexed Bond (IIB) — coupon rate linked to inflation.
• Municipal Bonds — issued by local bodies. Now eligible for Repo and Reverse Repo.

Cross-border Bonds:

• Masala Bonds — Rupee-denominated, issued in foreign market. Currency risk on foreign investor. Launched by IFC (WB Group) in 2014. Regulated by RBI (under ECB framework) and SEBI.
• Maharaja bond (India, INR), Panda (China, RMB), Kangaroo (Australia, AUD), Yankee (US, USD), Samurai (Japan, Yen)

Special Purpose Bonds:

• Green Bond — for environmentally beneficial projects
• Blue Bond — for ocean/water-related projects
• Social Bond — for affordable housing, healthcare, education
• ZCZP Bond — issued by NPOs on Social Stock Exchange; no interest, no principal = effectively a donation
• Catastrophe Bond — issued by insurance companies; investor loses principal if disaster strikes

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1.5 Equity Concepts

Issuing Shares:

• IPO — First time offering to public. FPO — Already listed company issues fresh shares.
• Rights Issue — Offered to existing shareholders at discount. Private Placement — To small identified group.
• QIP — Listed company raises from institutional buyers. OFS — Promoters sell own shares; no fresh capital.
• Bonus Issue — Free additional shares by capitalising reserves. Share Pledging — Promoter borrows against shares.

IPO Concepts (Static):

Grey Market, Kerb & Dabba Trading (Static):

Fractional Shares (Static):

• SEBI proposed allowing retail investors to buy fractions of expensive shares (e.g., ₹500 worth of a ₹50,000 share).
• Aims to democratise access to high-value stocks for small investors.
• Already common in US markets (Robinhood, Schwab).
• Key concern: Voting rights, dividend allocation, corporate action handling for fractional holders.

ESOP — Employee Stock Ownership Plan (Static):

• Company grants employees the right to purchase shares at a predetermined price (exercise price) after a vesting period.
• Difference from Sweat Equity: ESOP = right to buy at discount; Sweat Equity = shares given free for non-cash contribution.
• Vesting Period — Minimum 1 year from grant date (SEBI Guidelines).
• Exercise Period — Time window after vesting to buy shares.
• Current: SEBI granted ESOP relief to startups — allowed them to extend exercise period and relax vesting conditions to retain talent.

Digital Gold Regulation (Static):

• Digital gold = gold bought online, stored in vaults by seller, redeemable in physical form.
• Currently unregulated — no single regulator (not under SEBI, RBI, or PFRDA).
• SEBI raised concerns over lack of investor protection, quality assurance, and storage standards.
• Proposed: Bring digital gold under SEBI regulation or create separate framework.

Investor Types: Angel → VC → PE → Retail → Institutional

Raising Capital from Foreign Markets:

• ADR (American Depository Receipt) — Indian shares deposited with custodian; U.S. bank issues receipts traded on U.S. exchanges.
• GDR (Global Depository Receipt) — Same concept but traded on international exchanges (commonly Europe).

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1.6 Investment Funds

ETF (Exchange Traded Fund) — Similar to mutual fund but traded on exchange. Record inflows into Gold ETF in 2024–25 due to gold price spike and rupee depreciation.

Current: SEBI reclassified REITs as equity instruments to boost participation by mutual funds and SIFs, while retaining InvITs under hybrid category.

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1.7 Derivatives

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1.8 Current Affairs — Financial Market

FPIs Withdraw from India:

• FPIs withdrew ₹23,885 crore from Indian stocks in 2025 — three consecutive months of net outflows (NSDL data).
• Reasons: tariff uncertainties, weak corporate earnings, high valuations, rupee depreciation reducing dollar returns.
• India's share in EM funds was 21% in 2024 but funds rotating towards China (28.8%).
• Indian markets relatively expensive on PE basis — trading at 22x earnings.
• Total foreign investment (portfolio + direct) as share of GDP fell to a 25-year low in 2024–25.

Digital Gold & Gold ETF:

• Indian households hold ~25,000 tonnes of gold — largest private reserve globally — worth $2.4 trillion (>55% of GDP).
• 200% increase in gold demand in October due to gold price spike.
• Commodities on Indian exchanges: Hard (metals, energy) vs Soft (agriculture, agri-processed).

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1.9 Corporate Governance (Static)

Companies Act 2013 — Administered by Ministry of Corporate Affairs. Establishes:

• NCLT — adjudicates company law disputes, mergers, insolvency
• NFRA — regulates auditors
• IEPFA — manages unclaimed dividends/shares
• SFIO — investigates corporate fraud

CSR — Section 135: Companies must spend 2% of average net profits of last 3 years if net worth ≥₹500 cr or turnover ≥₹1000 cr or net profit ≥₹5 cr.

CCI — Statutory body under Competition Act, 2002 (replaced MRTP Act, 1969). Under Ministry of Corporate Affairs.

Key Terms:

• Frontrunning — Broker trades on advance non-public info about upcoming large transaction. Illegal under SEBI.
• Insider Trading — Using non-public material company information to trade.
• Reverse Flipping — Indian startup moves legal domicile back from abroad to India.

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Chapter 2: Monetary Policy

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2.1 Monetary Policy Committee (MPC) — Static

Flexible Inflation Targeting (FIT) Framework:

• Present FIT framework (4% ±2%) was ending March 2026, under review.
• RBI released discussion paper seeking views on key issues.
• High inflation = regressive consumption tax affecting poorer households disproportionately.
• Since dismantling automatic monetisation (1994), RBI gained functional autonomy. In 2016, India adopted FIT.
• Headline vs Core: If objective is to protect poor and promote savings → target headline inflation.
• Data shows beyond 6% inflation, growth rate declines sharply.

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2.2 RBI's Monetary Policy Instruments

Banks Lending Rate Evolution: Administered → BPLR → Base Rate → MCLR → External Benchmark

Monetary Policy Transmission — MCLR vs External Benchmarking (Static):

• Why transmission was poor: Banks' deposit rates are sticky (small depositors won't withdraw). Banks funded by term deposits can't instantly reduce cost. MCLR allowed banks to delay.
• Solution: RBI mandated external benchmarking → loan rates move in sync with repo rate.

Banking System Liquidity (Static):

• Meaning: Amount of funds available in the banking system for lending. If banks have excess funds parked with RBI → surplus liquidity. If banks borrow from RBI → deficit.
• Factors affecting: Govt spending (↑liquidity), Tax outflows (↓liquidity), Forex operations (RBI buying $ = ↑INR liquidity), Currency in circulation (↓liquidity), CRR changes.
• Surplus liquidity → Banks lend more, rates fall, credit grows, risk of inflation.
• Deficit liquidity → Banks borrow from RBI, lending slows, rates rise.
• RBI tools to manage: OMO, VRR/VRRR, Forex swaps, CRR changes, SDF/MSF corridor.

Variable Rate Repo (VRR) & Forex Swaps (Static):

• VRR — RBI conducts auction-based repo for a specified period (14-day, 28-day etc.) at variable rates determined by market bidding. Injects liquidity for longer duration than overnight LAF.
• VRRR (Variable Rate Reverse Repo) — Absorbs surplus liquidity via auction at variable rates.
• Forex Swap — RBI buys dollars (spot) and simultaneously agrees to sell them back at a future date. Net effect: injects INR liquidity for the swap tenure without permanently affecting forex reserves.

Factors Affecting Bond Yields (Static):

• US-India Bond Yield Gap: Fell to 20-year low — Indian yields fell (rate cuts) while US yields stayed elevated. Narrows the carry trade advantage → FPIs pull out.

Unconventional Monetary Policies (Static):

• Japan ended NIRP in March 2024 — first rate hike in 17 years. Rising wages and inflation (2.8%) allowed exit.
• Germany overtook Japan as world's largest creditor nation — Japan's NIRP era weakened yen, eroding value of overseas assets.

Cantillon Effect — Increase in money supply does not affect all sectors simultaneously but redistributes purchasing power in favour of those who receive new money first.

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2.3 Current Affairs — Monetary Policy (2025–26)

Repo Rate Cut & Expansionary Policy:

• MPC cut repo rate to 5.50% — aimed at spurring growth.
• CRR reduced by 100 bps to provide liquidity and improve monetary policy transmission.
• Real GDP growth for 2025-26 projected at 6.5%.
• Simultaneously, fiscal policy turned expansionary (income tax cuts in Feb 2025). Both push up aggregate demand → could fuel inflation.
• Policy stance: Neutral (shift from earlier 'Accommodative') — allows flexibility to raise or cut rates.

Inflation Context:

• Inflation fell to six-year low of ~3% in June 2025, aided by early monsoons and strong harvests.
• Retail inflation at 1.54% in September (8-year low), breaching RBI's lower bound of 2%.
• Below 4% target for last nine months, averaging 2.3%.
• Credit growth at 3-year low (9%) and unemployment rose to 5.6% in May 2025.

OMO & Liquidity Measures:

• RBI announced OMO purchases of G-Secs worth ₹1,00,000 crore.
• Three-year USD/INR Buy-Sell swap of $5 billion to inject durable liquidity (clarified as liquidity measure, not to support rupee).
• Earlier in Feb 2025, RBI carried out $10 billion dollar/rupee buy-sell swap.

Credit-Deposit Ratio:

• India's CD ratio increased from 53% (2000-01) to 82% — signifies better financial development.
• Higher CD ratio = banks lending more relative to deposits = potential liquidity stress.
• Factors: Rising credit demand, financial deepening, shift from physical savings to financial assets.
• Implications: Potential liquidity stress, asset-liability mismatch, risk of instability if deposits don't keep pace.
• Steps needed: Mobilise deposits (raise rates), reduce CD ratio dependency, diversify funding sources.

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Chapter 3: RBI

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3.1 RBI — Institutional Framework

RBI Portals: e-Kuber (core banking), UDGAM (unclaimed deposits), PRAVAAH (licensing), Daksh (supervision)

Payments Regulatory Board (PRB):

• In September 2025, RBI established 6-member PRB to oversee and regulate all payment systems (digital and traditional) under Payment and Settlement Systems Act, 2007.
• Chaired by RBI Governor. Replaces former BPSS.

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3.2 RBI's Economic Capital Framework (ECF)

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3.3 Currency, Forex & Rupee

Rupee Depreciation:

• Sharp depreciation of 4.3% against USD — worst performing currency in Asia.
• Rupee fell to record low of 92.36 per USD (linked to West Asia conflict, crude >$110/barrel).
• Twin shocks: U.S. 50% tariff on India + high precious metal prices.
• FPIs pulling out → sell rupees to buy dollars. Gold import bill spiked to $14.72 billion in October.
• RBI sold net ~$50 billion in forex to stabilise rupee. India's forex reserves: **$693 billion**.

RBI's Managed Float:

• Under floating-but-managed regime, RBI can only "smoothen volatility" not fix exchange rate.
• RBI's calculated gamble: weak rupee makes Indian goods cheaper abroad → offset tariff pain.
• Depreciation of nominal exchange rate ≠ guaranteed real exchange rate depreciation.

NEER and REER:

• NEER — Weighted average of rupee's exchange rates vs 40 trading partner currencies (base: 2015-16).
• REER — NEER adjusted for inflation differentials. True gauge of whether currency is overvalued/undervalued.
• If rupee's nominal rates stay same but Indian prices rise faster → REER goes up → Indian products less competitive.

Internationalisation of Rupee:

• Increasing use of rupee in cross-border transactions.
• Requires full convertibility on capital account. India currently has only full convertibility on current account.

Currency Swaps:

• 2019: $5 billion three-year dollar/rupee swap. Feb 2025:$10 billion swap to infuse long-term rupee liquidity.
• Standard central bank tool to supply liquidity, shore up forex reserves, prevent disorderly depreciation.

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3.4 Cryptocurrency & Stablecoins

CBDC (Central Bank Digital Currency) — Salient Features (Static):

CBDC Developments (Current):

• Unified Market Interface (UMI) — Tokenisation of financial assets using CBDC infrastructure. RBI exploring tokenised G-Secs and bonds on DLT.
• Project mBridge — Multi-country CBDC platform for cross-border payments. Partners: BIS Innovation Hub + central banks of China, UAE, Thailand, Hong Kong. India is observer.
• Project Agora — BIS initiative exploring how tokenised deposits and CBDCs can improve cross-border payments. 7 central banks participate (incl. RBI).

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3.5 Sovereign Gold Bonds (SGB) & Sovereign Green Bonds

Sovereign Gold Bonds:

• Debt securities issued by RBI on behalf of government, each unit = 1 gram of gold.
• Launched in 2015. Aim: reduce physical gold demand, mobilise household savings into financial assets.
• Interest: Fixed 2.5% per annum on initial investment amount.
• Tradable on stock exchange. Denominated in grams of gold.
• Capital gains tax exempted for original buyers holding till redemption.
• Budget 2026-27: CGT exemption now only for original buyers holding till maturity — not for secondary market purchasers.
• Gold price spike + rupee depreciation → huge investment in gold and Gold ETFs.

Sovereign Green Bonds (Static):

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3.6 Banking Laws Amendment Act, 2025

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3.7 Retail Direct Scheme

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3.8 RBI Initiatives (Current)

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🎯 Trap vs. Reality — Part 1

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Quick Revision Markers:

• RBI surplus FY25: ₹2.69 lakh crore (highest ever)
• Repo rate: 5.50% (cut twice in 2025)
• CRR cut: 100 bps
• Inflation: ~3% (June 2025, 6-year low); 1.54% (Sep 2025, 8-year low)
• GDP growth projection 2025-26: 6.5%
• Forex reserves: $693 billion
• Rupee record low: 92.36/USD
• CD Ratio: 82% (up from 53% in 2000-01)
• GNPA: 2.15% (historic low)
• Crypto TDS: 1% per transaction
• SEBI: Statutory since 1992; RBI: Nationalised 1949; MPC: Constituted 2016
• FIT: 4% ± 2% (CPI-based)
• CRB: 4.5–7.5% of balance sheet