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?

Updated 11 Apr 2026

Contents15
UPSC Prelims GS2023Indian Economy
  1. AOnly one
  2. BOnly two
  3. COnly three
  4. DAll four
Show answer

Answer: (B) Only two

Capital markets deal with long-term instruments.

Government Bonds (5-40 years) and Stock Markets are capital market instruments — so statements 1 and 4 are correct.

Call Money Market (overnight lending between banks) and Treasury Bills (short-term government borrowing) are money market instruments — so statements 2 and 3 are not capital markets.

Only two are correct.

Answer is (b).

Why this was asked

Capital markets handle long-term instruments (typically over 1 year) while money markets handle short-term instruments (under 1 year).

SEBI regulates capital markets (stocks, bonds) while RBI regulates money markets (call money, treasury bills), making this classification crucial for understanding financial regulation in India.

Capital Markets Definition & Instruments

Indian Economy Capital markets Government Bond Market Stock Market

Capital Markets: Long-term Investment & Financing Hub

Must know

Capital markets deal with long-term instruments (maturity > 1 year)

Government bonds and stocks are capital market instruments

Good to know

Capital markets facilitate long-term capital formation for businesses and government

What Are Capital Markets

Capital markets are financial markets where long-term securities (maturity over 1 year) are traded. They channel savings from investors to businesses and government for long-term financing needs.

Capital Market Instruments

Instrument

Issuer

Maturity

Purpose

Government Bonds

Central/State Government

5-40 years

Fund government expenditure

Corporate Bonds

Companies

3-30 years

Raise debt capital

Equity Shares

Companies

Perpetual

Raise equity capital

Preference Shares

Companies

Long-term/Perpetual

Hybrid financing

Key Functions

Price discovery through continuous trading of securities

Liquidity provision allowing investors to buy/sell long-term instruments

Capital formation by channeling household savings to productive investments

Risk distribution across multiple investors and instruments

Exam traps

Trap: Government bonds are capital market instruments despite being issued by government

Trap: Don't confuse Treasury Bills (money market) with Government Bonds (capital market)

Trap: Stock market includes both equity and debt securities - both are capital market

Money Markets Definition & Instruments

Indian Economy Call Money Market Treasury Bill Market

Money Markets: Short-term Liquidity & Cash Management

Must know

Money markets deal with short-term instruments (maturity ≤ 1 year)

Call money and Treasury Bills are money market instruments

Good to know

Primary purpose is liquidity management and short-term funding

What Are Money Markets

Money markets are financial markets for short-term borrowing and lending (maturity up to 1 year). They help manage immediate liquidity needs of banks, corporates, and government.

Money Market Instruments

Instrument

Participants

Maturity

Purpose

Call Money

Banks & Primary Dealers

Overnight to 14 days

Manage daily cash shortfalls

Treasury Bills

Government via RBI

91, 182, 364 days

Short-term government borrowing

Commercial Paper

Corporates

7 days to 1 year

Corporate short-term funding

Certificate of Deposit

Banks

7 days to 1 year

Bank deposit instrument

Key Features

High liquidity - instruments can be easily bought and sold

Low risk - short maturity reduces interest rate and default risk

Low returns - safety comes at cost of lower yields

Large denominations - typically institutional investors only

Exam traps

Trap: Call money is overnight lending between banks, not stock market calls

Trap: Treasury Bills are short-term (≤1 year), Government Bonds are long-term

Trap: Money markets have low risk, low return - don't confuse with capital markets

Capital Markets vs Money Markets

Indian Economy

Capital vs Money Markets: The 1-Year Maturity Divide

Must know

1 year maturity is the dividing line between money and capital markets

Money markets: ≤ 1 year, Capital markets: > 1 year

Good to know

Both markets serve different financing needs and risk-return profiles

Key Differences

Aspect

Money Markets

Capital Markets

Maturity

≤ 1 year

> 1 year

Purpose

Liquidity management

Long-term capital formation

Risk Level

Low

Moderate to High

Return

Lower

Higher

Participants

Banks, institutions

All types of investors

Examples

Call money, T-Bills, CP

Stocks, bonds, debentures

Question Analysis

In this PYQ, Government Bonds (5-40 years) and Stock Market belong to capital markets due to long-term nature. Call Money (overnight) and Treasury Bills (≤364 days) are money market instruments. Only 2 out of 4 are capital markets.

Exam traps

Trap: Government securities can be both - T-Bills (money market) vs Bonds (capital market)

Trap: Don't assume all government instruments belong to same market category

Trap: Stock market is always capital market regardless of trading frequency

Government Bonds in India

Indian Economy Government Bond Market

Government Bonds (G-Secs): Long-term Government Borrowing

Must know

G-Secs are long-term government bonds with 5-40 year maturity

Issued by RBI on behalf of government for capital market funding

Good to know

Considered risk-free as backed by government guarantee

What Are G-Secs

Government Securities (G-Secs) are long-term bonds issued by central and state governments to fund their expenditure. Unlike Treasury Bills, these have maturity over 1 year, making them capital market instruments.

Types of G-Secs

Type

Issuer

Maturity

Interest Payment

Central G-Secs

Central Government

5-40 years

Semi-annual coupon

State Development Loans

State Governments

10-30 years

Semi-annual coupon

Treasury Bills

Central Government

91-364 days

Zero coupon (discount)

Market Features

Primary market: RBI conducts auctions for fresh issuance

Secondary market: Active trading on stock exchanges and OTC

Yield curve: Different yields for different maturities guide market rates

SLR compliance: Banks must hold minimum 18% of deposits in G-Secs

Exam traps

Trap: G-Secs include both T-Bills (money market) and bonds (capital market)

Trap: State government bonds are also G-Secs, not just central government

Trap: G-Secs are risk-free for credit but carry interest rate risk