INTRODUCTION TO THE INDIAN FINANCIAL MARKETS

Introduction to the Indian Financial Markets

Overview of Indian Economy: The Indian economy has evolved from an agriculture-based economy to one dominated by services and manufacturing, contributing three-fourths of its GDP.
Indian Financial Markets: Financial markets facilitate the efficient allocation of resources by channeling surplus funds from lenders (or investors) to borrowers (or businesses).
Role of Regulators of Financial Markets: The regulation of financial markets is motivated by the need to safeguard the interests of investors.
Structure of Financial Markets in India: The financial markets in India are categorized into Money Markets (short-term lending/borrowing) and Capital Markets (long-term funding via debt and equity).
Role of Participants: Market participants include banks, brokers, depositories, and institutional investors like mutual funds and pension funds, which enhance liquidity and asset pricing.

Key Features of Indian Financial Markets

Financial Markets: Facilitate the efficient allocation of resources by channeling surplus funds from lenders (or investors) to borrowers (or businesses).
Intermediaries: Intermediaries like banks, mutual funds, and insurance companies help in this process.
Market Categories: Markets are categorized into:
- Money Markets (short-term lending/borrowing)
- Capital Markets (long-term funding via debt and equity)
Transactions: Transactions occur in primary markets (new securities issuance) or secondary markets (trading among investors).

Regulators of Financial Markets

Reserve Bank of India (RBI): Regulates commercial banks.
Securities and Exchange Board of India (SEBI): Regulates securities markets and commodity markets.
Insurance Regulatory and Development Authority of India (IRDAI): Regulates insurance companies.
Pension Fund Regulatory and Development Authority (PFRDA): Regulates the pension sector.
Ministry of Finance: Exercises a certain level of oversight on these and other regulatory institutions.
Financial Stability and Development Council (FSDC): Monitors and addresses financial stability, financial sector development, and financial inclusion.

Role of Regulators

RBI: Formulates, implements, and monitors monetary policy. Regulates and supervises the financial system.
SEBI: Protects the interests of investors in securities and promotes the development of, and regulates the securities market.
IRDAI: Regulates the insurance sector, including registering insurance companies and defining capital and net-worth requirements.
PFRDA: Regulates the National Pension System (NPS) and other pension schemes, and registers and regulates intermediaries.
Self-Regulatory Organizations (SROs): Represent a particular segment of the securities market and are recognized by SEBI. They must abide by SEBI directions and act in the best interest of investors.

Introduction to the Indian Financial Markets (Part 2)

Banking System: The banking system is the core of the financial structure of an economy, supporting its growth by accumulating savings and making credit available for productive activities. The Reserve Bank of India (RBI) is the regulator of the banking system and the monetary authority.
RBI: The RBI performs supervisory functions under the guidance of the Board for Financial Supervision (BFS), which oversees the financial sector, including commercial and co-operative banks, financial institutions, and non-banking finance companies.
Banks: Banks act as intermediaries between those with excess funds and those who need funds, mobilizing surplus funds by taking deposits and lending based on credit evaluation. They also provide a secure system for settling financial transactions and offer third-party products and services.

Key Players in the Banking System

Commercial Banks: Scheduled commercial banks (public sector, private sector, foreign banks, and regional rural banks) and non-scheduled commercial banks (local area banks).
Co-operative Credit Institutions: Urban co-operative banks and state and district level co-operative banks that cover rural area needs.
Payment Banks: Encourage financial inclusion by providing small savings accounts and payment/remittance services to low-income households and small businesses.
Small Finance Banks: Provide savings vehicles, banking facilities, and credit to small businesses, marginal farmers, and micro and small industries.

Non-Banking Finance Companies (NBFCs)

Definition: Companies engaged in loans and advances, leasing, hire purchase, insurance business, or chit business, but cannot accept demand deposits or issue cheques.
Role: Fill the gap in lending where banks are unable to lend due to high risk or reach.

Other Financial Institutions

Housing Finance Companies: Primary business is lending for property/real estate purchases, regulated by the RBI.
P2P Lending: Unsecured lending between individuals through peer-to-peer lending platforms, regulated by the RBI.
Money Market: A part of the financial market where instruments with short-term maturities (< 1 year) are traded, including call money, commercial paper, and Treasury Bills.
Foreign Exchange Market: A market where currencies are exchanged, with a spot market, forward market, and currency derivatives contracts trading on exchanges.

Credit Information and Account Aggregators

Credit Information Companies: Provide credit reports and scores to help lenders make informed decisions, regulated by the Credit Information Companies (Regulation) Act, 2005.
Account Aggregators: Licensed by the RBI to consolidate customer information and share it with third parties, facilitating digital lending and reducing paperwork.

Securities Market under SEBI

Definition of Securities: Includes shares, bonds, debentures, derivative contracts, units of collective investment schemes, and security receipts.
Securities Market: Comprises the primary market (new securities issuance) and secondary market (existing securities trading), with securities exchanges facilitating trading and ensuring fair valuation and liquidity.

Introduction to the Indian Financial Markets (Part 3)

Clearing Corporations: Ensure confirmation, settlement, and delivery of transactions on stock exchanges, setting up risk management systems to prevent default risks.
Depositories: Enable electronic holding of financial assets, such as equities, bonds, and mutual funds, allowing for dematerialized trading.
Depository Participants: Act as agents of depositories, holding demat securities and facilitating transactions for investors.

Key Intermediaries in the Indian Financial Markets

Custodians: Hold securities and manage bank accounts for institutional investors, handling transactions and maintaining records.
Stock Brokers: Registered trading members of stock exchanges, executing buy and sell transactions and providing research and analysis to investors.
Bond Market: A platform for trading debt securities, such as bonds, debentures, and government securities.
Derivatives Market: A market for trading instruments that derive their value from underlying assets, such as futures and options.

Investment Products and Services

Mutual Funds: Collective investment schemes that pool money from multiple investors to invest in a variety of assets.
Investment Advisers: Professionals who guide clients in creating a portfolio of investments tailored to their risk appetite and goals.
Alternative Investment Funds: Private pools of money invested in accordance with a defined policy, catering to sophisticated investors.
KYC Registration Agencies: Maintain records of investors' identities and verification details, facilitating smooth transactions.

Regulatory Bodies and Supporting Entities

Credit Rating Agencies: Evaluate the creditworthiness of issuers and assign ratings to help investors assess risk.
Investment Banks: Provide strategic advice and arrange funding for companies, governments, and other entities.
Asset Management Companies and Portfolio Managers: Offer investment services, including selecting and managing portfolios of securities.
Registrar and Transfer Agencies: Facilitate investor services, such as dividend payments and voting, for companies and mutual funds.

Insurance Industry and Markets under IRDAI

Life Insurance: Offers risk protection and investment products, including traditional, variable, and unit-linked policies.
General Insurance: Covers non-life risks, such as motor, health, and fire insurance.
Insurance Intermediaries: Include brokers, agents, corporate agents, surveyors, and loss assessors, who distribute insurance products and provide services to policyholders.

Introduction to the Indian Financial Markets (Part 4)

Pension Market Regulator: The Pension Fund Regulatory and Development Authority (PFRDA) is the regulator of the pension market in India.
National Pension System (NPS): The NPS is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to make optimum decisions regarding their future through systematic savings during their working life.
Key Factors: A growing elderly population and a large unorganized employment market are two primary factors that define the pension industry in India.
Retirement Benefit Coverage: Much of the Indian population is still outside the formal retirement benefit cover provided by the government and its associated organisations, and companies covered under the Employees Provident Fund Organisation (EPFO) rules.
Pension Plan Structure: The government’s pension plan has moved from a defined benefit structure to a defined contribution structure, where the employee and the employer contribute to the pension fund and the pension received on retirement will depend upon the fund accumulated.
Private Sector Retirement Benefits: The retirement benefits in the private sector are primarily covered by the Employee Provident Fund administered and supervised by the Employee Provident Fund Organisation with contributions made both by the employee and the employer.
Investment Choices: There are different fund managers under the NPS which offer different investment choices for the investor.
Eligibility: The NPS is available for government employees and the general public to voluntarily contribute periodically and create a retirement corpus.

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