Financial Markets for UPSC: Money & Capital Markets, SEBI, Bonds, AIFs, Mutual Funds & Securities Markets Code 2025

Money Market, Capital Market and Regulators

🎯 Exam priority: High-yield. Financial markets produced 16 questions in ten years and four more in the 2025 paper alone (AIFs, BRSR/SEBI, bonds vs stocks, equity options) and four in 2026 (RWA tokenisation, sustainability bonds, TReDS, crowdfunding). The skill tested is precise definition — what is a money-market instrument, who regulates what, which bond is which.

Financial markets are where savings meet investment. India's household savings are moving from deposits to equities and mutual funds, and the 2025 Survey puts numbers on it.

The map: money market vs capital market

• Money-market instruments, precisely. Commercial Paper (CP) is a short-term, unsecured promissory note issued by creditworthy companies, primary dealers and financial institutions; Certificates of Deposit (CD) are negotiable deposit certificates issued by banks and select financial institutions; TREPS (the successor to the old CBLO — Collateralised Borrowing and Lending Obligation, run by the Clearing Corporation of India) is a collateralised money-market lending/borrowing instrument. UPSC 2024 asked: CBLOs are instruments of the money market. Treasury Bills (91, 182, 364 days) are zero-coupon.

• An IPO sells new shares to the public for the first time; an Offer for Sale (OFS) lets existing shareholders sell their stake (no new capital raised for the company); a QIP sells shares to qualified institutional buyers; a rights issue offers existing shareholders new shares in proportion.

• Settlement: India moved to T+1 settlement for equities in January 2023 (shares are credited the next trading day) and offers an optional faster window; shares are held in demat form with depositories (NSDL, CDSL).

Who regulates what

Bonds, G-secs, Credit Ratings and the Debt Gap

Bonds are the least-understood and most-tested part of the market. UPSC's 2025 question captured the essence: a bondholder is a lender; a stockholder is an owner.

Bonds and government securities

• Bond vs stock (2025 PYQ): bondholders lend money, get fixed interest (coupon) and are prioritised over stockholders for repayment, so they carry lower risk and lower return; stockholders own the company, take residual profit and risk.

• Government securities: Treasury Bills (up to 364 days, zero-coupon, Centre only), dated G-secs (Centre) and State Development Loans (States). The RBI manages the public debt of the Centre and, by agreement, of States. Retail investors can buy G-secs through RBI Retail Direct (2021). Bond price and yield move in opposite directions; yields respond to the repo rate, fiscal deficit and US Fed policy.

• Special bonds: Inflation-Indexed Bonds protect investors from inflation (principal/interest linked to a price index); convertible bonds can be exchanged for equity; Masala bonds are rupee-denominated bonds issued overseas (the currency risk lies with the investor; IFC issued the first in 2014); green bonds fund environmental projects only, social bonds social projects only, and sustainability bonds fund a combination of both (UPSC 2026); municipal bonds finance city infrastructure; Sovereign Gold Bonds (2015) gave gold-linked returns without physical gold.

• Credit rating agencies (CRISIL, ICRA, CARE, India Ratings, Acuité, Infomerics) are regulated by SEBI — not the RBI (UPSC 2022). A rating signals the borrower's ability to repay.

Corporate bonds: the gap in the market

• The Economic Survey notes that outstanding corporate bonds rose from ₹17.5 trillion (FY15) to ₹53.6 trillion (FY25) (about 12% a year), with record fresh issuance of ₹9.9 trillion in FY25 — yet the market is only about 15–17% of GDP against equity market capitalisation above 130% of GDP (the US corporate-bond market is about 40% of GDP, China's 36%). More than 99% of funds are raised through private placements, and debt was over 63% of primary-market resource mobilisation in April–December 2025.

• Union Budget 2026-27 proposes a market-making framework for corporate bonds, derivatives on corporate-bond indices, total return swaps on corporate bonds and an incentive of ₹100 crore for any single municipal bond issue above ₹1,000 crore (the AMRUT scheme continues to support issues up to ₹200 crore).

SEBI, the Securities Markets Code 2025 and the Retail Revolution

SEBI is the guardian of the capital market. 2025 brought both a new law and a flood of retail investors.

SEBI and the Securities Markets Code, 2025

• SEBI was set up in 1988 and given statutory powers by the SEBI Act, 1992; it has quasi-legislative (regulations), executive (inspection, registration) and quasi-judicial (orders; appeals go to the Securities Appellate Tribunal) powers.

• The Securities Markets Code, 2025 (introduced in Lok Sabha on 18 December 2025; referred to a Standing Committee) repeals and replaces three laws — the Securities Contracts (Regulation) Act 1956, the SEBI Act 1992 and the Depositories Act 1996. It makes SEBI rule-making transparent and consultative, caps the validity of SEBI's interim orders at 180 days (extendable with reasons, up to two years), enlarges the SEBI board from nine to a larger board with up to 15 government-appointed members including at least five full-time, and brings market infrastructure institutions (exchanges, clearing corporations, depositories) onto a statutory footing.

• 2025 SEBI measures: a verified UPI address structure for intermediaries collecting investors' money (1 October 2025) and the "SEBI Check"; a framework for ESG debt securities (social, sustainability, sustainability-linked); a Past Risk and Return Verification Agency to verify performance claims of advisers, research analysts and algo providers; electricity derivatives (monthly futures at NSE, 18 July 2025); and F&O curbs — a single weekly expiry day (Tuesday or Thursday), a portfolio-level open-interest method and intraday position-limit monitoring.

• BRSR (Business Responsibility and Sustainability Report) is a SEBI requirement for the top listed companies and is largely non-financial (ESG) disclosure — the RBI does not mandate it (UPSC 2025).

The retail revolution: demat, mutual funds, SIPs

• Demat accounts passed 21.6 crore (235 lakh added in FY26 to December); unique investors crossed 12 crore in September 2025 (about a quarter women); the mutual-fund industry had 5.9 crore unique investors by December 2025, of whom 3.5 crore were from tier-II and smaller cities.

• Household savings shift: the share of equity and mutual funds in annual household financial savings rose from about 2% (FY12) to over 15.2% (FY25), while the share of deposits fell from over 58% to about 35%. Average monthly SIP flows rose sevenfold, from under ₹4,000 crore (FY17) to over ₹28,000 crore (April–November FY26); mutual-fund assets are about 23% of GDP (over ₹80 lakh crore). Individuals' share of equity ownership reached 18.8% (September 2025), with the indirect (mutual-fund) share nearly tripling.

• Primary market: ₹10.7 lakh crore raised in FY26 (April–December); IPO volumes up 20%; main-board listings 94 against 69; Offer-for-Sale was 58% of IPO proceeds; SME-platform listings 217 against 190. Over FY22–FY26 the primary market mobilised ₹53 lakh crore.

AIFs, Mutual Funds, Derivatives, P-Notes and the 2026 Budget

Beyond shares and bonds lies a layer of pooled vehicles, derivatives and new-age instruments — all favourites of the "how many of the following" format.

Funds, trusts and derivatives

• Budget 2026-27 tax signals for the markets: the Securities Transaction Tax on futures was raised from 0.02% to 0.05%, and on options premium and exercise to 0.15% (from 0.1% and 0.125%) — a "course correction" in the F&O segment; share buybacks will be taxed as capital gains for all shareholders, with an extra buyback tax on promoters (effective 22% for corporate promoters and 30% for non-corporate promoters); and the capital-gains exemption on Sovereign Gold Bonds is limited to individuals who subscribed at the original issue and hold the bond until maturity.

• F&O mania (2025 PYQ): India accounts for a very large share of global equity-option contracts traded, and its stock market has at times overtaken Hong Kong's by market capitalisation — but SEBI does act against unregistered advisers and warns small investors, so a statement that no regulator does is wrong.

Why this matters for UPSC

• Memorise a one-line definition for each instrument and the regulator; then link to the 2025-26 facts (21.6 crore demat accounts, deposits down to 35% of savings, corporate bonds 15–17% of GDP, the Securities Markets Code).

Further Reading

• NCERT Economics textbooks (Class 11–12), the Economic Survey, the Union Budget documents and RBI publications cited in this note — the primary sources behind every figure above.

Test Yourself: Practice Questions & PYQs

Twelve practice questions on instruments, regulators, bonds and the 2025-26 market data, followed by real UPSC questions on financial markets.

Practice Questions

Q1. Which of the following are instruments of the money market in India?
1. Treasury Bills
2. Commercial Paper
3. Certificates of Deposit
4. Corporate debentures of 10-year maturity

• (a) 1, 2, 3 and 4

• (b) 1, 2 and 3 only

• (c) 1 and 4 only

• (d) 2, 3 and 4 only

Q2. Which one of the following statements about Commercial Paper is correct?

• (a) It is a short-term unsecured promissory note issued by creditworthy borrowers

• (b) It is issued only by commercial banks

• (c) It carries a government guarantee

• (d) It is a long-term secured debenture

Q3. In India, credit rating agencies are regulated by

• (a) the Competition Commission of India

• (b) the Reserve Bank of India

• (c) the Securities and Exchange Board of India

• (d) the Ministry of Finance

Q4. Statement-I: Bondholders are generally considered to be at lower risk than stockholders.
Statement-II: Bondholders are lenders to a company whereas stockholders are its owners, and bondholders are repaid before stockholders.
Which one of the following is correct in respect of the above statements?

• (a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

• (b) Statement-I is correct but Statement-II is not correct

• (c) Statement-I is not correct but Statement-II is correct

• (d) Both Statement-I and Statement-II are correct but Statement-II does not explain Statement-I

Q5. A bond whose proceeds are used to finance both environmental and social projects is called a

• (a) masala bond

• (b) sustainability bond

• (c) social bond

• (d) green bond

Q6. With reference to Alternative Investment Funds (AIFs) in India, consider the following statements:
1. They are regulated by SEBI.
2. Category III AIFs may use leverage and complex trading strategies.
3. They can raise funds from the general public through an IPO.
Which of the statements given above are correct?

• (a) 1, 2 and 3

• (b) 2 and 3 only

• (c) 1 and 2 only

• (d) 1 and 3 only

Q7. Participatory Notes (P-Notes) are

• (a) issued by Indian companies to NRIs

• (b) issued by SEBI-registered foreign portfolio investors to overseas investors who wish to invest in Indian securities without registering directly

• (c) bonds issued by the Government in foreign currency

• (d) issued by the RBI to banks

Q8. The Securities Markets Code, 2025 seeks to

• (a) create a new regulator for insurance

• (b) replace the SEBI Act, the SCRA and the Depositories Act with a single code

• (c) regulate only cryptocurrencies

• (d) abolish SEBI

Q9. According to the Economic Survey 2025-26, which of the following is correct about India's corporate bond market?

• (a) It accounts for about 15-17 per cent of GDP against equity market capitalisation above 130 per cent

• (b) It is larger than in the United States as a share of GDP

• (c) Most funds are raised through public issues

• (d) It is deeper than the equity market as a share of GDP

Q10. In the Union Budget 2026-27, the Securities Transaction Tax on futures was proposed to be raised to

• (a) 0.1 per cent

• (b) 0.15 per cent

• (c) 0.05 per cent

• (d) 0.02 per cent

Q11. As per the Economic Survey 2025-26, the share of deposits in household financial savings declined from over 58 per cent in FY12 to about

• (a) 45 per cent in FY25

• (b) 35 per cent in FY25

• (c) 25 per cent in FY25

• (d) 50 per cent in FY25

Q12. Which of the following describes an 'Offer for Sale' (OFS) in an IPO?

• (a) A bonus issue

• (b) Existing shareholders sell their shares to the public

• (c) The company issues fresh shares to raise capital

• (d) A rights issue to existing shareholders

UPSC Previous Year Questions (PYQs)

Real UPSC Prelims questions, checked against the official paper and answer key.

Q1. (2019) Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

• (a) Commercial Paper

• (b) Promissory Note

• (c) Participatory Note

• (d) Certificate of Deposits

Q2. (2022) With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"?
1. Government can reduce the coupon rates on its borrowing by way of IIBs.
2. IIBs provide protection to the investors from uncertainty regarding inflation.
3. The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct?

• (a) 2 and 3 only

• (b) 1 and 3 only

• (c) 1 and 2 only

• (d) 1, 2 and 3

Q3. (2022) Consider the following statements:
1. In India, credit rating agencies are regulated by Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.
3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct.

• (a) 2 and 3 only

• (b) 1, 2 and 3

• (c) 1 and 3 only

• (d) 1 and 2 only

Q4. (2022) With reference to Convertible Bonds, consider the following statements:
1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Which of the statements given above is/are correct?

• (a) 1only

• (b) 2 only

• (c) Both 1 and 2

• (d) Neither 1 nor 2

Q5. (2023) 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) All four

• (b) Only one

• (c) Only two

• (d) Only three

Q6. (2024) In India, which of the following can trade in Corporate Bonds and Government Securities?
1. Insurance Companies
2. Pension Funds
3. Retail Investors
Select the correct answer using the code given below:

• (a) 1, 2 and 3

• (b) 1 and 3 only

• (c) 2 and 3 only

• (d) 1 and 2 only

Q7. (2024) Consider the following:
1. Exchange-Traded Funds (ETF)
2. Motor vehicles
3. Currency swap
Which of the above is/are considered financial instruments?

• (a) 1, 2 and 3

• (b) 1 and 3 only

• (c) 2 and 3 only

• (d) 1 only

Q8. (2024) With reference to the Indian economy, "Collateral Borrowing and Lending Obligations are the instruments of:

• (a) Stock market

• (b) Forex market

• (c) Money market

• (d) Bond market

Q9. (2025) With reference to investments, consider the following:
I. Bonds
II. Hedge Funds
III. Stocks
IV. Venture Capital
How many of the above are treated as Alternative Investment Funds?

• (a) Only one

• (b) Only three

• (c) All the four

• (d) Only two

Q10. (2025) Consider the following statements:
Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.
Statement II: Bondholders are lenders to a company whereas stockholders are its owners.
Statement III: For repayment purpose, bondholders are prioritized over stockholders by a company.
Which one of the following is correct in respect of the above statements?

• (a) Neither Statement II nor Statement III is correct

• (b) Only one of the Statements II and III is correct and that explains Statement I

• (c) Both Statement II and Statement III are correct and both of them explain Statement I

• (d) Both Statement I and Statement II are correct and Statement I explains Statement II

Q11. (2025) Consider the following statements:
I. India accounts for a very large portion of all equity option contracts traded globally thus exhibiting a great boom.
II. India's stock market has grown rapidly in the recent past even overtaking Hong Kong's at some point of time.
III. There is no regulatory body either to warn the small investors about the risks of options trading or to act on unregistered financial advisors in this regard.
Which of the statements given above are correct?

• (a) I and II only

• (b) II and III only

• (c) I and III only

• (d) I, II and III

Q12. (2026) A bond whose proceeds are used only to finance or refinance a combination of both environmental and social projects is called:

• (a) Sustainability Bond

• (b) Green Bond

• (c) Social Bond

• (d) Sovereign Bond

Q13. (2018) Consider the following statements:
1. The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.
2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the statement Govern- ments.
3. Treasury bills offer are issued at a discount from the par value.
Which of the statements given above is/are correct?

• (a) 1, 2 and 3

• (b) 3 only

• (c) 2 and 3 only

• (d) 1 and 2 only

Q14. (2021) Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below.

• (a) 1 and 2 only

• (b) 1, 2 and 3

• (c) 2 only

• (d) 3 only

Q15. (2021) With reference to India, consider the following statements:
1. Retail investors through demat account can invest in 'Treasury Bills' and 'Government of India Debt Bonds' in primary market.
2. The 'Negotiated Dealing System-Order Matching' is a government securities trading platform of the Reserve Bank of India.
3. The 'Central Depository Services Ltd' is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?

• (a) 3 only

• (b) 1 only

• (c) 2 and 3

• (d) 1 and 2

Mains Practice Questions

Use these to frame full-length answers. You don't have to answer one exactly — they show the angles UPSC tests, so let them guide which points you cover.

• Distinguish between the money market and the capital market, with instruments and regulators.

• What are the features of Alternative Investment Funds, REITs/InvITs and mutual funds? Why does SEBI regulate them differently?

• Why is India's corporate bond market shallow, and what is being done (market making, total return swaps, municipal bond incentives) to deepen it?

• Examine the shift of household savings to equities and mutual funds in India and the regulatory challenges it raises (F&O, mis-selling).

UPSC Mains — Previous Years’ Questions on this topic (last 10 years)

These are the actual GS Mains questions UPSC has asked on this theme — real proof of how, and when, it is tested. Try to write a full answer to each.

• 2018 (GS-III): Comment on the important changes introduced in respect of the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.