Increase in GST rates on secondary derivatives will withdraw money from which market?

Question

Accepted Answer

The correct option is 3:

The **Capital Market** is the venue where instruments used for long-term financing—such as stocks and bonds—are traded. **Derivatives**, which include futures, options, and swaps, are financial instruments whose value is "derived" from an underlying asset, and they are integral components of the capital market structure, particularly in the secondary market (where existing securities are traded). When the Goods and Services Tax (GST) rate on secondary derivatives increases, the transaction cost of trading these instruments rises. Higher transaction costs discourage trading activity, making it more expensive for investors to buy and sell. Consequently, investors and traders may reduce their participation or shift their funds away from these investments, leading to a reduction in liquidity and effectively **withdrawing money** or capital from this market segment.

The incorrect option is 1: The **Money Market** deals with short-term, highly liquid debt instruments (like Treasury bills and commercial paper) with maturities typically under one year. Derivatives traded here are usually short-term interest rate derivatives, but the term "secondary derivatives" most commonly refers to those traded on exchanges related to long-term equity and debt, placing them firmly in the capital market domain.

The incorrect option is 2: The **Subsidy Market** is not a recognized term within financial economics or market structure. Subsidies relate to government financial assistance provided to reduce costs, not a distinct market where financial instruments are traded.

The incorrect option is 4: The **Factor Market** is where the factors of production—land, labor, capital, and entrepreneurship—are bought and sold. While financial capital is a factor of production, the trading of derivatives is specifically a function of the financial market, which is institutionally separate from the primary resource markets (factor markets).