Evolution of Indian Financial Markets

Bachelor of Commerce
Financial Markets
Semester V

(2014-15)

Submitted by

Yash Hiranandani

Roll No. 13

H.R. COLLEGE OF COMMERCE & ECONOMICS

123, D.W. Road, Churchgate, Mumbai 400 020.

Evolution of Indian Financial Markets

Submitted by
Yash Hiranandani

Bachelor of Commerce
Financial Markets
In Partial Fulfillment of the requirements

Semester V

For the Award of Degree of Bachelor of

Commerce Financial Markets

Roll No - 13
H.R. COLLEGE OF COMMERCE & ECONOMICS
123, D.W. Road, Churchgate, Mumbai 400020

H.R COLLEGE OF COMMERCE AND

ECONOMICS
2

123, D.W. Road, Churchgate, Mumbai 400020

CERTIFICATE

This is to certify that Shri Yash Hiranandani of

B.Com.-Financial Markets Semester V (20142015 ) has successfully completed the project
on 21-09-2014 under the guidance of Professor
Meena Desai.

Principal

Project Guide

Internal Examiner

External Examiner

DECLARATION

I, Yash Sanjay Hiranandani the student of

B.Com.- Financial Markets Semester V (2014 2015) hereby declare that I have completed the
Project on 21-09-2014.

The information submitted is true and original

to the best of my knowledge.

Signature of the Student

Name of the Student:

Yash Hiranandani

Roll No. 13

INDEX
Sr. No

Topic

Page No

Introduction

Money and Capital Market 10

Development of

26

Indian Financial
Market
4

Problems and

73

Solutions

Executive Summary

Financial Markets are the heart and soul of any nations economy. The
economic health of a country is dependant on the performance of these
financial markets such as Equities Markets, Commodities Markets, Forex
Markets etc. These markets have existed since as far as back as the
1800s. Investors trade on these markets and the markets are influenced
by these activities. In this project I have focused on the progress these
markets have made over the years, especially in recent times. I have
focused on mainly on the following markets:

Capital Markets: Stock markets and Bond markets

Commodity Markets

Money Markets

Derivatives Markets: Futures Markets

Insurance Markets

Foreign Exchange Markets

The Indian financial sector has undergone radical transformation over

the 1990s. Reforms have altered the organizational structure, ownership
pattern and domain of operations of institutions and infused
competition in the financial sector. This has forced financial institutions
to reposition themselves in order to survive and grow. The extensive
progress in technology has enabled markets to graduate from outdated
systems to modern business processes, bringing about a significant
reduction in the speed of execution of trades and in transaction costs.
6

This project also compares these markets in the past and focuses on the
changes made over the years in these markets and how these improvements
have bettered the numbers and efficiency of the financial sector in India.

Research Methodology Used

1. I spoke to family members who have had experience in the

financial markets and took their opinions into consideration as
they have seen the changes taken by the government when it comes
to the markets and also the effects of these modifications.
2. I also researched and went through papers published by experts on
the Indian Financial System.
3. Went through old articles in business newspapers.
4. Went through official publications by NSE, BSE and RBI.

Introduction
7

Indian Financial Market helps in promoting the savings of the economy helping to adopt an effective channel to transmit various financial
policies. The Indian financial sector is well-developed, competitive,
efficient and integrated to face all shocks. In the India financial market
there are various types of financial products whose prices are determined
by the numerous buyers and sellers in the market. The other
determinant factor of the prices of the financial products is the market
forces of demand and supply. The various other types of Indian markets
help in the functioning of the wide India financial sector.

What does the India Financial market comprise of? It talks about the
primary market, FDIs, alternative investment options, banking and
insurance and the pension sectors, asset management segment as well.
With all these elements in the India Financial market, it happens to be
one of the oldest across the globe and is definitely the fastest growing
and best among all the financial markets of the emerging economies. The
history of Indian capital markets spans back 200 years, around the end
of the 18th century. It was at this time that India was under the rule of
the East India Company. The capital market of India initially developed
around Mumbai; with around 200 to 250 securities brokers participating
in active trade during the second half of the 19th century.

The financial market in India at present is more advanced than many

other sectors as it became organized as early as the 19th century with the
securities exchanges in Mumbai, Ahmedabad and Kolkata. In the early
1960s, the number of securities exchanges in India became eight including Mumbai, Ahmedabad and Kolkata. Apart from these three
8

exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune
exchanges as well. Today there are 23 regional securities exchanges in
India.

The Indian Financial Markets can be divided into the CapitalMarket and
the Money Market as shown in the diagram below

MEANING OF MONEY MARKET:9

A money market is a market for borrowing and lending of shortterm funds. It deals in funds and financial instruments having a maturity
period of one day to one year. It is a mechanism through which shortterm funds are loaned or borrowed and through which a large part of
financial transactions of a particular country or of the world are cleared.
It is different from stock market. It is not a single market but a
collection of markets for several instruments like call money market,
Commercial bill market etc. The Reserve Bank of India is the most
important constituent of Indian money market. Thus RBI describes
money market as the centre for dealings, mainly of a short-term
character, in monetary assets, it meets the short-term requirements of
borrowers and provides liquidity or cash to lenders.

PLAYERS OF MONEY MARKET :In money market transactions of large amount and high volume take
place. It is dominated by small number of large players. In money
market the players are :-Government, RBI, DFHI (Discount and finance
House of India) Banks, Mutual Funds, Corporate Investors, Provident
Funds, PSUs (Public Sector Undertakings), NBFCs (Non-Banking
Finance Companies) etc.
The role and level of participation by each type of player differs from
that of others.

FUNCTIONS OF MONEY MARKET :10

1) It caters to the short-term financial needs of the economy.

2) It helps the RBI in effective implementation of monetary policy.
3) It provides mechanism to achieve equilibrium between demand and
supply of short-term
funds.
4) It helps in allocation of short term funds through inter-bank transactions
and money market
Instruments.
5) It also provides funds in non-inflationary way to the government to meet
its deficits.
6) It facilitates economic development.

STRUCTURE OF INDIAN MONEY MARKET

I.

Organised Sector Of Money Market :Organised Money Market is not a single market, it consist of number

of markets. The most important feature of money market instrument is

that it is liquid. It is characterised by high degree of safety of principal.
Following are the instruments which are traded in money market

1)

Call And Notice Money Market :The market for extremely short-period is referred as call money

market. Under call money market, funds are transacted on overnight

11

basis. The participants are mostly banks. Therefore it is also called InterBank Money Market. Under notice money market funds are transacted
for 2 days and 14 days period. The lender issues a notice to the borrower
2 to 3 days before the funds are to be paid. On receipt of notice, borrower
have to repay the funds.
In this market the rate at which funds are borrowed and lent is called
the call money rate. The call money rate is determined by demand and
supply of short term funds. In call money market the main participants
are commercial banks, co-operative banks and primary dealers. They
participate as borrowers and lenders. Discount and Finance House of
India (DFHI), Non-banking financial institutions like LIC, GIC, UTI,
NABARD etc. are allowed to participate in call money market as lenders.
Call money markets are located in big commercial centres like
Mumbai, Kolkata, Chennai, Delhi etc. Call money market is the indicator
of liquidity position of money market. RBI intervenes in call money
market as there is close link between the call money market and other
segments of money market.

2)

Treasury Bill Market (T - Bills) :This market deals in Treasury Bills of short term duration issued by

RBI on behalf of Government of India. At present three types of treasury

bills are issued through auctions, namely 91 day, 182 day and364day
treasury bills. State government does not issue any treasury bills.
Interest is determined by market forces. Treasury bills are available for a
minimum amount of Rs. 25,000 and in multiples of Rs. 25,000. Periodic
auctions are held for their Issue.
T-bills are highly liquid, readily available; there is absence of risk of
default. In India T-bills have narrow market and are undeveloped.
12

Commercial Banks, Primary Dealers, Mutual Funds, Corporates,

Financial Institutions, Provident or Pension Funds and Insurance
Companies can participate in T-bills market.
3)

Commercial Bills :Commercial bills are short term, negotiable and self liquidating

money market instruments with low risk. A bill of exchange is drawn by

a seller on the buyer to make payment within a certain period of time.
Generally, the maturity period is of three months. Commercial bill can be
resold a number of times during the usance period of bill. The
commercial bills are purchased and discounted by commercial banks
and are rediscounted by financial institutions like EXIM banks, SIDBI,
IDBI etc.
In India, the commercial bill market is very much underdeveloped.
RBI is trying to develop the bill market in our country. RBI have
introduced an innovative instrument known as Derivative .Usance
Promissory Notes, with a view to eliminate movement of papers and to
facilitate multiple rediscounting.
4)

Certificate Of Deposits (CDs) :CDs are issued by Commercial banks and development financial

institutions. CDs are unsecured, negotiable promissory notes issued at a

discount to the face value. The scheme of CDs was introduced in 1989 by
RBI. The main purpose was to enable the commercial banks to raise
funds from market. At present, the maturity period of CDs ranges from 3
months to 1 year. They are issued in multiples of Rs. 25 lakh subject to a
minimum size of Rs. 1 crore. CDs can be issued at discount to face value.
13

They are freely transferable but only after the lock-in-period of 45 days
after the date of issue.
In India the size of CDs market is quite small.
In 1992, RBI allowed four financial institutions ICICI, IDBI, IFCI
and IRBI to issue CDs with a maturity period of. one year to three years.
5)

Commercial Papers (CP) :Commercial Papers wereintroduced in January 1990. The

Commercial Papers can be issued by listed company which have working

capital of not less than Rs. 5 crores. They could be issued in multiple of
Rs. 25 lakhs. The minimum size of issue being Rs. 1 crore. At present the
maturity period of CPs ranges between 7 days to 1 year. CPs are issued at
a discount to its face value and redeemed at its face value.
6)

Money Market Mutual Funds (MMMFs) :A Scheme of MMMFs was introduced by RBI in 1992. The goal was

to provide an additional short-term avenue to individual investors. In

November 1995 RBI made the scheme more flexible. The existing
guidelines allow banks, public financial institutions and also private
sector institutions to set up MMMFs. The ceiling of Rs. 50 crores on the
size of MMMFs stipulated earlier, has been withdrawn. MMMFs are
allowed to issue units to corporate enterprises and others on par with
other mutual funds. Resources mobilised by MMMFs are now required
to be invested in call money, CD, CPs, Commercial Bills arising out of
genuine trade transactions, treasury bills and government dated
securities having an unexpired maturity upto one year. Since March 7,
2000 MMMFs have been brought under the purview of SEBI
regulations. At present there are 3 MMMFs in operation.

14

7)

The Repo Market ;Repo was introduced in December 1992. Repo is a repurchase

agreement. It means selling a security under an agreement to repurchase

it at a predetermined date and rate. Repo transactions are affected
between banks and financial institutions and among bank themselves,
RBI also undertake Repo.
In November 1996, RBI introduced Reverse Repo. It means buying a
security on a spot basis with a commitment to resell on a forward basis.
Reverse Repo transactions are affected with scheduled commercial
banks and primary dealers.
In March 2003, to broaden the Repo market, RBI allowed NBFCs,
Mutual Funds, Housing Finance and Companies and Insurance
Companies to undertake REPO transactions.
8)

Discount And Finance House Of India (DFHI)

In 1988, DFHI was set up by RBI. It is jointly owned by RBI, public

sector banks and all India financial institutions which have contributed
to its paid up capital.It is playing an important role in developing an
active secondary market in Money Market Instruments. In February
1996, it was accredited as a Primary Dealer (PD). The DFHI deals in
treasury bills, commercial bills, CDs, CPs, short term deposits, call
money market and government securities.

15

Unorganised Sector Of Money Market :The economy on one hand performs through organised sector and on
other hand in rural areas there is continuance of unorganised, informal
and indigenous sector. The unorganised money market mostly finances
short-term financial needs of farmers and small businessmen. The main
constituents of unorganised money market are:1)

Indigenous Bankers (IBs)

Indigenous bankers are individuals or private firms who receive

deposits and give loans and thereby operate as banks. IBs accept
deposits as well as lend money. They mostly operate in urban areas,
especially in western and southern regions of the country. The volume of
their credit operations is however not known. Further their lending
operations are completely unsupervised and unregulated. Over the years,
the significance of IBs has declined due to growing organised banking
sector.
2)

Money Lenders (MLs)

They are those whose primary business is money lending. Money

lending in India is very popular both in urban and rural areas. Interest
rates are generally high. Large amount of loans are given for
unproductive purposes. The operations of money lenders are prompt,
informal and flexible. The borrowers are mostly poor farmers, artisans,
petty traders and manual workers. Over the years the role of money
lenders has declined due to the growing importance of organised
banking sector.
16

3)

Non - Banking Financial Companies (NBFCs)

They consist of :-

1.

Chit Funds
Chit funds are savings institutions. It has regular members who

make periodic subscriptions to the fund. The beneficiary may be selected

by drawing of lots. Chit fund is more popular in Kerala and Tamilnadu.
Rbi has no control over the lending activities of chit funds.

2.

Nidhis :Nidhis operate as a kind of mutual benefit for their members only.

The loans are given to members at a reasonable rate of interest. Nidhis

operate particularly in South India.

3.

Loan Or Finance Companies

Loan companies are found in all parts of the country. Their total
capital consists of borrowings, deposits and owned funds. They give
loans to retailers, wholesalers, artisans and self employed persons. They
offer a high rate of interest along with other incentives to attract
deposits. They charge high rate of interest varying from 36% to 48% p.a.

17

4.

Finance Brokers

They are found in all major urban markets specially in cloth, grain
and commodity markets. They act as middlemen between lenders and
borrowers. They charge commission for their services.

18

FEATURES AND DEFICIENCIES OF INDIAN MONEY

MARKET
Indian money market is relatively underdeveloped when compared
with advanced markets like New York and London Money Markets. Its'
main features / defects are as follows

1. Dichotomy:A major feature of Indian Money Market is the existence of

dichotomy i.e. existence of two markets: -Organised Money Market and
Unorganised Money Market. Organised Sector consist of RBI,
Commercial Banks, Financial Institutions etc. The Unorganised Sector
consist of IBs, MLs, Chit Funds, Nidhis etc. It is difficult for RBI to
integrate the Organised and Unorganised Money Markets. Several
segments are loosely connected with each other. Thus there is dichotomy
in Indian Money Market.

2. Lack Of Co-ordination And Integration :It is difficult for RBI to integrate the organised and unorganised
sector of money market. RBT is fully effective in organised sector but
unorganised market is out of RBIs control. Thus there is lack of
integration between various sub-markets as well as various institutions
and agencies. There is less co-ordination between co-operative and
commercial banks as well as State and Foreign banks. The indigenous
bankers have their own ways of doing business.

19

3. Diversity In Interest Rates :There are different rates of interest existing in different segments of
money market. In rural unorganised sectors the rate of interest are high
and they differ with the purpose and borrower. There are differences in
the interest rates within the organised sector also. Although wide
differences have been narrowed down, yet the existing differences do
hamper the efficiency of money market.

4. Seasonality Of Money Market :Indian agriculture is busy during the period November to June
resulting in heavy demand for funds. During this period money market
suffers from Monetary Shortage resulting in high rate of interest. During
slack season rate of interest falls &s there are plenty offunds available.
RBI has taken steps to reduce the seasonal fluctuations, but still the
variations exist.

5. Shortage Of Funds :In Indian Money Market demand for funds exceeds the supply.
There is shortage of funds in Indian Money Market an account of various
factors like inadequate banking facilities, low savings, lack of banking
habits, existence of parallel economy etc. There is also vast amount of
black money in the country which have caused shortage of funds.
20

However, in recent years development of banking has improved the

mobilisation of funds to some extent.

6. Absence Of Organised Bill Market :A bill market refers to a mechanism where bills of exchange are
purchased and discounted by banks in India. A bill market provides
short term funds to businessmen. The bill market in India is not popular
due to overdependence of cash transactions, high discounting rates,
problem of dishonour of bills etc.

7. Inadequate Banking Facilities :Though the commercial banks, have been opened on a large scale,
yet banking facilities are inadequate in our country. The rural areas are
not covered due to poverty. Their savings are very small and mobilisation
of small savings is difficult. The involvement of banking system in
different scams and the failure of RBI to prevent these abuses of banking
system shows that Indian banking system is not yet a well organised
sector.

21

CAPITAL MARKET
Capital market is a market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc. The buying/selling is
undertaken by participants such as individuals and institutions.

Capital markets help channelise surplus funds from savers to institutions

which then invest them into productive use. Generally, this market
trades mostly in long-term securities.
Capital market consists of primary markets and secondary markets.
Primary markets deal with trade of new issues of stocks and other
securities, whereas secondary market deals with the exchange of existing
or previously-issued securities. Another important division in the capital
market is made on the basis of the nature of security traded, i.e. stock
market and bond market.

Capital market in any country consists of equity and the debt markets.
Within the debt market there are govt securities and the corporate bond
market. For developing countries, a liquid corporate bond market can
play a critical role in supporting economic development as
It supplements the banking system to meet corporate sector
requirements for long-term capital investment and asset creation.
It provides a stable source of finance when the equity market is volatile.

22

A well structures corporate bond market can have implications on

monetary policy of a country as bond markets can provide relevant
information about risks to price stability
Despite rapidly transforming financial sector and a fast growing
economy India's corporate bond market remains underdeveloped. It is
still dominated by the plain vanilla bank loans and govt securities. The
dominance of equities and banking system can be gauged from the fact
that since 1996, India's stock market capitalisation as a percentage of
GDP has increased to 108% from 32.1%, while the banking sector's ratio
to GDP has risen from 46.3% to 78.2% in 2008. In contrast, the bond
markets grew to a modest 43.4 percent of GDP from 21.3 percent. Of this
corporate bonds account for around 3.2% of GDP and government bond
market accounts for 38.3% of GDP.
Indias government bond market stands ahead of most East-Asian
emerging markets but most of it is used as a source of financing the
deficit. The size of the Indian corporate debt market is very small in
comparison with not only developed markets, but also some of the
emerging market economies in Asia such as Malaysia, Thailand and
China

23

Characteristics and features

Innovation and a Plethora of options:
Over time great innovations have been witnessed in the corporate bond
issuances, like floating rate instruments, convertible bonds, callable
(put-able) bonds, zero coupon bonds and step-redemption bonds. This
has brought a variety that caters to a wider customer base and helps
them maintain strike a risk-return balance.

Preference for private placement:

In India, issuers tend to prefer Private Placement over public issue as

against USA where majority of corporate bonds are publically issued.
In India while private placement grew 6.23 times to Rs. 62461.80 crores
in 2000-01 since 1995-96, the corresponding increase in public issues of
debt has been merely 40.95 percent from the 1995-96 levels.This leads to
a crunch in market liquidity. A number of factors are responsible for
such preference. First, the companies can avoid the lengthy issuance
procedure for public issues. Second is the low cost of private placement.
Third, the amounts that can be raised through private placements are
typically larger. Fourth, the structure of debt can be negotiated according
to the needs of the issuer. Finally, a corporate can expect to raise debt
from the market at finer rates than the PLR of banks and financial
institutions only with an AAA rated paper. This limits the number of
entities that would find it profitable to enter the market directly. Even
though the listing of privately placed bonds has been made mandatory, a
24

proper screening mechanism is missing to take care of the quality and

transparency issues of private placement deals.

Dominance of financial institutions:

The public issues market has over the years been dominated by financial
institutions. The issuers who are the main participants in other
corporate bond markets (that is, private sector, non-financial), represent
only a small proportion of the corporate debt issues in the Indian
market. Most of the privately placed bonds (which are about 90% of the
total issue of corporate bonds) are issued by the financial and the public
sector.

Inefficient secondary market:

Further the secondary market for non-sovereign debt, especially
corporate paper still remains plagued by inefficiencies. The primary
problem is the total lack of market making in these securities, which
consequently leads to poor liquidity. The biggest investors in this
segment of the market, namely LIC, UTI prefer to hold these
instruments to maturity, thereby holding the supply of paper in the
market.
The listed corporate bonds also trade on the Wholesale Debt Segment of
NSE. But the percentage of the bonds trading on the exchange is small.
Number of trades in debt compared to equity on average for August
2007 is just 0.003%.

25

DEVELOPMENT OF INDIAN FINANCIAL

MARKETS

As all the Financial Markets in India together form the Indian Financial
Markets, all the Financial Markets of Asia together form the Asian
Financial Markets; likewise all the Financial Markets of all the countries
of the world together form the Global Financial Markets. Financial
Markets deal with trading (buying and selling) of financial securities
(stocks and bonds), commodities (valuable metals or food grains), and
other exchangeable and valuable items at minimum transaction costs
and market efficient prices. Financial Markets can be domestic or
international. The Global Financial Markets work as a significant
instrument for improved liquidity.
Financial Markets can be categorized into six types:

Capital Markets: Stock markets and Bond markets

Commodity Markets

Money Markets
26

Derivatives Markets: Futures Markets

Insurance Markets

Foreign Exchange Markets

In recognition of the critical role of the financial markets, the initiation

of the structural reforms in the early 1990s in India also encompassed a
process of phased and coordinated deregulation and
liberalisation of financial markets. Financial markets in India in the
period before the early 1990s were marked by administered interest
rates, quantitative ceilings, statutory pre-emptions, captive market for
government securities, excessive reliance on central bank financing,
pegged exchange rate, and current and capital account restrictions. As a
result of various reforms, the financial markets have transited to a
regime characterised by market-determined interest and exchange rates,
price-based instruments of monetary policy, current account
convertibility, phased capital account liberalisation and an auction-based
system in the government securities market.

27

Money market

The Reserve Bank has accorded prime attention to the development of

the money market as it is the key link in the transmission mechanism of
monetary policy to financial markets and finally, to the real economy
(Annex I). In the past, development of the money market was hindered
by a system of administered interest rates and lack of proper accounting
and risk management systems. With the initiation of reforms and the
transition to indirect, market-based instruments of monetary policy in
the 1990s, the Reserve Bank made conscious efforts to develop an
28

efficient, stable and liquid money market by creating a favourable policy

environment through appropriate institutional changes, instruments,
technologies and market practices. Accordingly, the call money market
was developed into primarily an inter-bank market, while encouraging
other market participants to migrate towards collateralised segments of
the market, thereby increasing overall market integrity.
In line with the objective of widening and deepening of the money
market and imparting greater liquidity to the market for facilitating
efficient price discovery, new instruments, such as collateralised lending
and borrowing obligations (CBLO), have been introduced. Money market
instruments such as market repo and CBLO have provided avenues for
non-banks to manage their short-term liquidity mismatches and
facilitated the transformation of the call money market into a pure interbank market.
Furthermore, issuance norms and maturity profiles of other money
market instruments such as commercial paper (CP) and certificate of
deposits (CDs) have been modified over time to encourage wider
participation while strengthening the transmission of policy signals
across the various market segments. The abolition of ad hoc Treasury
Bills and introduction of regular auctions of Treasury Bills paved the way
for the emergence of a risk free rate, which has become a benchmark for
pricing the other money market instruments. Concomitantly, with the
increased market orientation of monetary policy along with greater
global integration of domestic markets, the Reserve Banks emphasis has
been on setting prudential limits on borrowing and lending in the call
money market, encouraging migration towards the collateralised
segments and developing derivative instruments for hedging market
risks. This has been complemented by the institutionalisation of the
29

Clearing Corporation of India Limited (CCIL) as a central counterparty.

The upgradation of payment system technologies has also enabled
market participants to improve their asset liability management. All
these measures have
After the adoption of the full-fledged LAF in June 2000, call rates, in
general, witnessed a declining trend up to 2004-05. The institution of
LAF has also enabled the Reserve Bank to manage liquidity more
efficiently and reduce volatility in call rates. Volatility, measured by the
coefficient of variation (CV) of call rates, has declined significantly in the
current decade as compared with that in the 1990s, with some increase
in 2006-07, as already noted. BIS Review 51/2007. The reduction in bidask spread in the overnight rates indicates that the Indian money market
has become reasonably deep, vibrant and liquid. During April
2004February 2007, the bid-ask spread has varied within a range of
-0.37 to +1.32 basis points with an average of 16 basis points and
standard deviation (SD) of 11 basis points (coefficient of variation being
68.8). Despite a higher degree of variation, however, the bid-ask spread
remained within the 2-SD band around the average during most of the
period.
Interim Liquidity Adjustment Facility (ILAF) in April 1999, under which
liquidity injection was done at the Bank Rate and liquidity absorption
was through fixed reverse repo rate. The ILAF gradually transited into a
full-fledged liquidity adjustment facility (LAF) with periodic
modifications based on experience and development of financial markets
and the payment system. The LAF was operated through overnight fixed
rate repo and reverse repo from November 2004, which provided an
informal corridor for the call money rate. Though the LAF helped to
develop interest rate as an instrument of monetary transmission, two
30

major weaknesses came to the fore. First was the lack of a single policy
rate, as the operating policy rate alternated between repo during deficit
liquidity situation and reverse repo rate during surplus liquidity
condition. Second was the lack of a firm corridor, as the effective
overnight interest rates dipped (rose) below (above) the reverse repo
(repo) rate in extreme surplus (deficit) conditions. Recognising these
shortcomings, a new operating procedure was put in place in May 2011.
These are the key features of the new operating procedure. First, the
weighted average overnight call money rate was explicitly recognised as
the operating target of monetary policy. Second, the repo rate was made
the only one independently varying policy rate. Third, a new Marginal
Standing Facility (MSF) was instituted under which scheduled
commercial banks (SCBs) could borrow overnight at 100 basis points
above the repo rate up to one per cent of their respective net demand and
time liabilities (NDTL). This limit was subsequently raised to two per
cent of NDTL and in addition, SCBs were allowed to borrow funds under
MSF on overnight basis against their excess SLR holdings as well.
Moreover, the Bank Rate being the discount rate was aligned to the MSF
rate. Fourth, the revised corridor was defined with a fixed width of 200
basis points. The repo rate was placed in the middle of the corridor, with
the reverse repo rate at 100 basis points below it and the MSF rate as
well as the Bank Rate at 100 basis points above it. Thus, under the new
operating procedure, all the three other rates announced by the Reserve
Bank, i.e., reverse repo rate, MSF rate and the Bank Rate, are linked to
the single policy repo rate. The new operating procedure was expected to
improve the implementation and transmission of monetary policy for the
following reasons. First, explicit announcement of an operating target
makes market participants clear about the desired policy impact. Second,
a single policy rate removes the confusion arising out of policy rate
31

alternating between the repo and the reverse repo rates, and makes
signalling of monetary policy stance more accurate. Third, MSF provides
a safety valve against unanticipated liquidity shocks. Fourth, a fixed
interest rate corridor set by MSF rate and reverse repo rate, reduces
uncertainty and communication difficulties and helps keep the overnight
average call money rate close to the repo rate.

Since May 2011, the liquidity conditions can be broadly divided into
three distinct phases.
After generally remaining within the Reserve Banks comfort zone during
the first phase during MayOctober 2011, the liquidity deficit crossed the
one per cent of NDTL level during November 2011 to June 2012. This
large liquidity deficit was mainly caused by forex intervention and
increased divergence between credit and deposit growth. The deficit
conditions were further aggravated by frictional factors like the build-up
of government cash balances with the Reserve Bank that persisted longer
than anticipated and the increase in currency in circulation. Accordingly,
the Reserve Bank had to actively manage liquidity through injection of
liquidity by way of open market operations (OMOs) and cut in cash
reserve ratio (CRR) of banks. This was supported by decline in currency
in circulation and a reduction in government cash balances with the
Reserve Bank. As a result, there was a significant easing of liquidity
conditions since July 2012 with the extent of the deficit broadly
returning to the Reserve Banks comfort level of one per cent of NDTL.

Second, the repo rate and weighted call rate are far more closely aligned
under the new operating procedure than earlier; implying improved
32

transmission of monetary policy in terms of movement in call money

market interest rate

Third, the call money rate in turn is observed to be better aligned with
other money market interest rates after the implementation of new
operating procedure than before
As a result of various reform measures, the money market in India has
undergone significant transformation in terms of volume, number of
instruments and participants and development of risk management
practices. In line with the shifts in policy emphasis, various segments of
the money market have acquired greater depth and liquidity. The price
discovery process has also improved. The call money market has been
transformed into a pure inter-bank market, while other money market
instruments such as market repo and CBLO have developed to provide
avenues to non-banks for managing their short-term liquidity
mismatches. The money market has also become more efficient as is
reflected in the narrowing of the bid-ask spread in overnight rates. The
abolition of ad hoc Treasury Bills and introduction of Treasury Bills
auction have led to the emergence of a risk free rate, which acts as a
benchmark for the pricing of other money market instruments.
In the development of various constituents of the money market, the
most significant aspect was the growth of the collateralised market vis-vis the uncollateralised market. Over the last decade, while the daily
turnover in the call money market either stagnated or declined, that of
the collateralised segment, market repo plus CBLO, increased manifold.
Since 200708, both the CP and CD volumes have also increased very
significantly. Furthermore, issuance of 91-treasury bills has also
33

increased sharply. The overall money market now is much larger relative
to GDP than a decade ago.

Major Developments in Money Market since the 1990s

1. Abolition of ad hoc treasury bills in April 1997

2. Full fledged LAF in June 2000.
3. CBLO for corporate and non-bank participants introduced in 2003
4. Minimum maturity of CPs shortened by October 2004
5. Prudential limits on exposure of banks and PDs to call/notice market
in April 2005
6. Maturity of CDs gradually shortened by April 2005
7. Transformation of call money market into a pure inter-bank market by
August 2005
8. Widening of collateral base by making state government securities
(SDLs) eligible for LAF operations since April 2007
9. Operationalisation of a screen-based negotiated system (NDS-CALL)
for all dealings in the call/notice and the term money markets in
September 2006. The reporting of all such transactions made
compulsory through NDS-CALL in November 2012.

34

10. Repo in corporate bonds allowed in March 2010.

11. Operationalisation of a reporting platform for secondary market
transactions in CPs and CDs in July 2010.

Government securities and Capital market

The Reserve Bank has actively pursued the development of the

government securities market since the early 1990s for a variety of
reasons (Annex II). First, with the Reserve Bank acting as the debt
manager to the Government, a well-developed and liquid government
securities market is essential to ensure the smooth passage of
Governments market borrowings to finance its deficit. Second, the
development of the government securities market is also necessary to
facilitate the emergence of a risk free rupee yield curve to serve as a
benchmark for pricing other debt instruments. Finally, the government
securities market plays a key role in the effective transmission of
monetary policy impulses in a deregulated environment.
35

In order to foster the development of the government securities market,

it was imperative to migrate from a regime of administered interest rates
to a market-oriented system. Accordingly, in the early 1990s, the Reserve
Bank initiated several measures. First, it introduced the auction system
for issuance of government securities. While initially only yield-based
multiple price auctions were conducted, uniform price-based auctions
were also employed during uncertain market conditions and while
issuing new instruments. Second, as the captive investor base was
viewed as constraining the development of the market, the statutory
prescription for banks investments in government and other approved
securities was scaled down from the peak level in February 1992 to the
statutory minimum level of 25 per cent by April 1997. As a result, the
focus shifted towards the widening of the investor base. A network of
intermediaries in the form of primary dealers was developed for this
purpose. Retail participation has been promoted in the primary market
(through a system of non-competitive bidding in the auctions) as well as
in the secondary market (by allowing retail trading in stock exchanges).
Simultaneously, the Reserve Bank also introduced new instruments with
innovative features to cater to perse market preferences, although the
experience in this regard has not been encouraging. Third, with the
discontinuance of the process of unconstrained recourse by the
Government to the Reserve Bank through automatic monetisation of
deficit and conversion of non-marketable securities to marketable
securities, the Reserve Bank gained more operational freedom. Fourth,
in an effort to increase liquidity, the Reserve Bank has, since the late
1990s, pursued a strategy of passive consolidation of debt by raising
progressively higher share of market borrowings through re-issuances.
This has resulted in critical mass in key maturities, and is facilitating the
emergence of market benchmarks. Fifth, improvement in overall
36

macroeconomic and monetary management that has resulted in lower

inflation, lower inflation expectations, and price stability has enabled the
elongation of the yield curve to maturities upto 30 years. Finally, the
Reserve Bank has also undertaken measures to strengthen the
technological infrastructure for trading and settlement. A screen-based
anonymous trading and reporting platform has been introduced in the
form of NDS-OM, which enables electronic bidding in primary auctions
and disseminates trading information with a minimum time lag.
Furthermore, with the setting up of CCIL, an efficient settlement
mechanism has also been institutionalised, which has imparted
considerable stability to the government securities market. With the
withdrawal from the primary market from April 1, 2006 in accordance
with the FRBM (Fiscal Responsibility and Budget Management Act)
stipulations, the Reserve Bank introduced various institutional changes
in the form of revamping and widening of the coverage of the Primary
Dealer (PD) system to meet the emerging challenges. Other measures
taken to deepen the market and promote liquidity include introduction
of when issued trading, short selling of government securities and
active consolidation of government debt through buy backs. Various
policy initiatives taken by the Reserve Bank over the years to widen and
deepen the government securities market in terms of instruments as well
as participants have enabled successful completion of market borrowing
programmes of the Government under varied circumstances. In
particular, a smooth transition to the post-FRBM phase has been
ensured. The system of automatic monetisation through ad hoc Treasury
Bills was replaced with Ways and Means Advances in 1997, because of
which the Government resorted to increased market borrowings to
finance its deficit. Accordingly, the size of the government securities
market has increased significantly over the years.
37

One of the key issues in the development of the market for a better price
discovery is liquidity of securities. It was observed that, of the universe of
a large number of outstanding securities, only a few securities are
actively traded in the secondary market. The Reserve Bank has been
following a policy of passive consolidation through re-issuance of
existing securities with a view to enhancing liquidity in the secondary
segment of the government securities market. The share of re-issuances
in the total securities issued was 97.7 per cent during 2005-06. Active
consolidation of government securities has also been attempted under
the debt buyback scheme introduced in July 2003, which is expected to
be more actively pursued now. As a result of the developmental
measures undertaken, the volume of transactions has increased manifold
over the past decade.
To keep the markets liquid and active even during the bearish times, and
more importantly, to give the participants a tool to better manage their
interest rate risk, intra-day short selling in government securities was
permitted among eligible participants, viz., scheduled commercial banks
(SCBs) and primary dealers (PDs) in February 2006. Subsequently, the
short positions were permitted to be carried beyond intra-day for a
period of five trading days, effective January 31, 2007. To further
improve the liquidity in the government securities market, guidelines for
trading in when issued WI market were issued by the Reserve Bank in
May, 2006. Trading in WI segment, which commenced in August
2006, was initially permitted in reissued securities. It takes place from
the date of announcement of auction till one day prior to allotment of
auctioned securities. The revised guidelines extending WI trading to
new issuances of Central Government securities on a selective basis were
issued in November 2006.

38

In developed economies, bond markets tend to be bigger in size than the

equity market. A well-developed capital market consists of both the
equity market and the bond market. In India, equity
markets are more popular and far developed than the debt markets. The
Indian debt market is composed of government bonds and corporate
bonds. However, the government bonds are
predominant (constituting 92% of the volume) and they form the liquid
component of the bond market. An active corporate bond market is
essential for India Inc. The corporate bond market is still at the nascent
stage. Although we have the largest number of listed companies on the
capital market, the share of corporate bonds in GDP is merely 3.3%,
compared to 10.6% in China 41.7% in Japan, 49.3% in Korea among
others. Further, close to 80% of corporate bonds comprises privately
placed debt of public financial institutions. The secondary market,
therefore, has not developed commensurately. Though there has been an
increase in the volumes, the trading activity is still negligible in the
secondary markets. If we look at the ratio of secondary market volume to
primary market volume, the ratio is below 1 indicating very low trading
activity in the secondary market.

Over the past few years, some significant reforms have been undertaken
to develop the bond market and particularly the corporate bond market.
The listing requirements for corporate debt have been simplified. Issuers
now need to obtain rating from only one credit rating agency unlike
earlier. Further, they are permitted to structure debt instruments, and
are allowed to do a public issue of below investment grade bonds. One
more welcome change was, the exemption of TDS on corporate debt
instruments issued in demat form and on recognized stock
39

exchanges.Data released by SEBI indicates that companies raised Rs 2.12

lakh crore through corporate bonds in 2009-10, up 22.71% from Rs 1.73
lakh crore in 2008-09. India has witnessed a boost in trading in the
recent past. Total trading in corporate bonds more than doubled from an
average of Rs. 1,550 crore in October 2009 to Rs 3,356 crore in March
2010, as reported by the National Stock Exchange and the Bombay Stock
Exchange

40

Foreign exchange market

Happenings in the foreign exchange market (henceforth forex market)

form the essence of the international finance. The foreign exchange
market is not limited by any geographical boundaries. It does not have
any regular market timings, operates 24 hours 7 days week 365 days a
year, characterized by ever-growing trading volume, exhibits great
heterogeneity among market participants with big institutional investor
buying and selling million of dollars at one go to individuals buying or
selling less than 100 dollar.

41

Traditionally Indian forex market has been a highly regulated one. Till
about 1992-93, government exercised absolute control on the exchange
rate, export-import policy, FDI ( Foreign Direct Investment) policy. The
Foreign Exchange Regulation Act(FERA)enacted in 1973, strictly
controlled any activities in any remote way related to foreign exchange.
FERA was introduced during 1973, when foreign exchange was a scarce
commodity. Post independence, union governments socialistic way of
managing business and the license raj made the Indian companies
noncompetitive in the international market, leading to decline in export.
Simultaneously India import bill because of capital goods, crude oil
&petrol products increased the forex outgo leading to sever scarcity of
foreign exchange. FERA was enacted so that all forex earnings by
companies and residents have to reported and surrendered (immediately
after receiving) to RBI (Reserve Bank of India) at a rate which was
mandated by RBI. FERA was given the real power by making any
violation of FERA was a criminal offense liable to imprisonment. It a
professed a policy of a person is guilty of forex violations unless he
proves that he has not violated any norms of FERA. To sum up, FERA
prescribed a policy nothing (forex transactions) is permitted unless
specifically mentioned in the act. Post liberalization, the Government of
India, felt the necessity to liberalize the foreign exchange policy. Hence,
Foreign Exchange Management Act (FEMA) 2000 was introduced.
FEMA expanded the list of activities in which a person/company can
undertake forex transactions. Through FEMA, government liberalized
the export-import policy, limits of FDI (Foreign Direct Investment) & FII
(Foreign Institutional Investors) investments and repatriations, crossborder M&A and fund raising activities. Prior to 1992, Government of
India strictly controlled the exchange rate. After 1992, Government of
India slowly started relaxing the control and exchange rate became more
42

and more market determined. Foreign Exchange Dealers association of

India (FEDAI), set up in 1958, helped the government of India in
framing rules and regulation to conduct forex exchange trading and
developing forex market In India.
The Indian foreign exchange market has witnessed far reaching changes
since the early 1990s following the phased transition from a pegged
exchange rate regime to a market determined exchange rate regime in
1993 and the subsequent adoption of current account convertibility in
1994 and substantial liberalisation of capital account transactions
(Annex III). Market participants have also been provided with greater
flexibility to undertake foreign exchange operations and manage their
risks. This has been facilitated through simplification of procedures and
availability of several new instruments.
There has also been significant improvement in market infrastructure in
terms of trading platform and settlement mechanisms. As a result of
various reform measures, liquidity in the foreign exchange market
increased by more than five times between 1997-98 and 2006-07.
In relative terms, turnover in the foreign exchange market was 6.6 times
the size of India's balance of payments during 2005-06 as compared
with 5.4 times in 2000-01. With the deepening of the foreign exchange
market and increased turnover, income of commercial banks through
such transactions increased significantly. Profit from foreign exchange
transactions accounted for more than 20 per cent of total profit of
scheduled commercial banks in the last 2 years.

Efficiency in the foreign exchange market has also improved as reflected

in the decline in bid-ask spreads. The bid-ask spread of Rupee/US$
43

market has almost converged with that of other major currencies in the
international market. On some occasions, in fact, the bid-ask spread of
Rupee/US$ market was lower than that of some major currencies
The EMEs experience, in general, in the 1990s has highlighted the
growing importance of capital flows in determining the exchange rate
movements as against trade flows and economic growth in the 1980s and
before. In the case of most developing countries, which specialise in
labour-intensive and low and intermediate technology products, profit
margins in the highly competitive markets are very thin and vulnerable
to pricing power by large retail chains. Consequently, exchange rate
volatility has significant employment, output and distributional
consequences. Foreign exchange market conditions have remained
orderly in the post-1993 period, barring occasional periods of volatility.
The Indian approach to exchange rate management has been to avoid
excessive volatility. Intervention by the Reserve Bank in the foreign
exchange market, however, has been relatively small compared to total
turnover in the market.
As a result of various measures, the Indian foreign exchange market has
evolved into a relatively mature market over a period of time with
increase in depth and liquidity. The turnover in the market has increased
over the years. With the gradual opening up of the capital account, the
forward premia are getting increasingly aligned with the interest rate
differential. There is also evidence of enhanced efficiency in the foreign
exchange market as is reflected in low bid-ask spreads. The gradual
development of the foreign exchange market has helped in smooth
implementation of current account convertibility and the phased and
gradual opening of the capital account. The availability of derivatives is
also helping domestic entities and foreign investors in their risk
44

management. This approach has helped India in being able to maintain

financial stability right through the period of economic reforms and
liberalisation leading to continuing opening of the economy, despite a
great degree of volatility in international markets, particularly during the
1990s.

1947 to1977: During 1947 to 1971, India exchange rate system followed
the par value system. RBI fixed rupees external par value at 4.15 grains
of fine gold. 15.432grains of gold is equivalent to 1 gram of gold. RBI
allowed the par value to fluctuate within the permitted margin of 1
percent. With the breakdown of the Bretton Woods System in 1971 and
the floatation of major currencies, the rupee was linked with PoundSterling. Since Pound-Sterling was fixed in terms of US dollar under the
Smithsonian Agreement of 1971, the rupee also remained stable against
dollar.
1978-1992: During this period, exchange rate of the rupee was officially
determined in terms of a weighted basket of currencies of Indias major
trading partners. During this period, RBI set the rate by daily
announcing the buying and selling rates to authorized dealers. In other
words, RBI instructed authorized dealers to buy and sell foreign currency
at the rate given by the RBI on daily basis. Hence exchange rate
fluctuated but within a certain range. RBI managed the exchange rate in
such a manner so that it primarily facilitates imports to India. As
mentioned in Section 5.1, the FERA Act was part of the exchange rate
regulation practices followed by RBI. Joint Initiative IITs and IISc
Funded by MHRD - 4 -NPTEL International Finance Vinod Gupta
School of Managment , IIT. Kharagpur Indias perennial trade deficit
widened during this period. By the beginning of 1991, Indian foreign
45

exchange reserve had dwindled down to such a level that it could barely
be sufficient for three-weeks worth of imports. During June 1991, India
airlifted 67 tonnes of gold, pledged these with Union Bank of Switzerland
and Bank of England, and raised US$ 605 millions to shore up its
precarious forex reserve. At the height of the crisis, between 2nd and 4th
June 1991, rupee was officially devalued by 19.5% from 20.5 to 24.5 to 1
US$. This crisis paved the path to the famed liberalization program of
government of India to make rules and regulations pertaining to foreign
trade, investment, public finance and exchange rate encompassing a
broad gamut of economic activities more market oriented.
1992 onwards: 1992 marked a watershed in Indias economic condition.
During this period, it was felt that India needs to have an integrated
policy combining various aspects of trade, industry, foreign investment,
exchange rate, public finance and the financial sector to create a marketoriented environment. Many policy changes were brought in covering
different aspects of import-export, FDI, Foreign Portfolio Investment
etc. One important policy changes pertinent to Indias forex exchange
system was brought in -- rupees was made convertible in current
account. This paved to the path of foreign exchange payments/receipts
to be converted at market-determined exchange rate. However, it is
worthwhile to mention here that changes brought in by government of
India to make the exchange rate market oriented have not happened in
one big bang. This process has been gradual.

46

Commodity Market

Commodity futures markets largely remain underdeveloped in India.

This is in spite of the countrys long history of commodity derivatives
trade as compared to the US and UK. A major contributor to this fact is
the extensive government intervention in the agricultural sector in the
post-independence era. In reality, the production and distribution of
several agricultural commodities is still governed by the state and
forwards as well as futures trading have only been selectively introduced
with stringent regulatory controls. Free trade in many commodity items
remains restricted under the Essential Commodities Act (ECA), 1955,
and forwards as well as future contracts are limited to specific

47

commodity items listed under the Forward Contracts (Regulation) Act

(FCRA), 1952.
The evolution of the organized futures market in India commenced in
1875 with the setting up of the Bombay Cotton Trade Association Ltd.
Following widespread discontent among leading cotton mill owners and
merchants over the functioning of the Bombay Cotton Trade Association,
a separate association, Bombay Cotton Exchange Ltd., was constituted in
1983. Futures trading in oilseeds originated with the setting up of the
Gujarati VyapariMandali in 1900, which carried out futures trading in
ground nuts, castor seeds and cotton. The Calcutta Hessian Exchange
Ltd. and the East India Jute Association Ltd. were set up in 1919 and
1927 respectively for futures trade in raw jute. In 1921, futures in cotton
were organized in Mumbai under the auspices of East India Cotton
Association (EICA). Before the Second World War broke out in 1939,
several futures markets in oilseeds were functioning in the states of
Gujarat and Punjab. Futures markets in Bullion began in Mumbai in
1920, and later, similar markets were established in Rajkot, Jaipur,
Jamnagar, Kanpur, Delhi and Calcutta. In due course, several other
exchanges were established in the country, facilitating trade in diverse
commodities such as pepper, turmeric, potato, sugar and jaggery.
Post independence, the Indian constitution listed the subject of Stock
Exchanges and Future Markets under the union list. As a result, the
regulation and development of the commodities futures markets were
defined solely as the responsibility of the central government. A bill on
forward contracts was referred to an expert committee headed by Prof.
A.D. Shroff and selected committees of two successive parliaments and
finally, in December 1952, the Forward Contracts (Regulation) Act was
48

enacted. The Forward Contracts (Regulation) rules were notified by the

central government in 1954. The futures trade in spices was first
organised by the India Pepper and Spices Trade Association (IPSTA) in
Cochin in 1957. However, in order to monitor the price movements of
several agricultural and essential commodities, futures trade was
completely banned by the government in 1966. Subsequent to the ban of
futures trade, many traders resorted to unofficial and informal trade in
futures. However, in Indias liberalization epoch as per the June 1980
Khusro committees recommendations, the government reintroduced
futures on selected commodities, including cotton, jute, potatoes, etc.
Following the introduction of economic reforms in 1991, the Government
of India appointed an expert committee on forward markets under the
chairmanship of Prof. K.N. Kabra in June 1993. The committee
submitted its report in September 1994, championing the reintroduction
of futures, which were banned in 1966, and expanding its coverage to
agricultural commodities, along with silver. In order to boost the
agricultural sector, the National Agricultural Policy 2000 envisaged
external and domestic market reforms and dismantling of all controls
and regulations in the agricultural commodity markets. It also proposed
an expansion of the coverage of futures markets to minimize the wide
fluctuations in commodity prices and for hedging the risk arising from
extreme price volatilities.

49

STRUCTURE, CONDUCT & CURRENT STATUS

Broadly, the commodities market exists in two distinct formsthe overthe-counter (OTC) market and the exchange based market. Further, as in
equities, there exists the spot and the derivatives segments. Spot markets
are essentially OTC markets and participation is restricted to people who
are involved with that commodity, such as the farmer, processor,
wholesaler, etc. A majority of the derivatives trading takes place through
the exchange-based markets with standardized contracts, settlements,
etc. The exchange-based markets are essentially derivative markets and
are similar to equity derivatives in their working, that is, everything is
standardized and a person can purchase a contract by paying only a
percentage of the contract value. A person can also go short on these
exchanges. Moreover, even though there is a provision for delivery, most
contracts are squared-off before expiry and are settled in cash. As a
result, one can see an active participation by people who are not
associated with the commodity. The typical structure of commodity
futures markets in India is as follows:
At present, there are 26 exchanges operating in India and carrying out
futures trading activities in as many as 146 commodity items. As per the
recommendation of the FMC, the Government of India recognized the
National Multi Commodity Exchange (NMCE), Ahmadabad; Multi
Commodity Exchange (MCX), National Commodity and Derivative
50

Exchange (NCDEX), Mumbai and Indian Commodity Exchange ( ICEX)

as nation-wide multi-commodity exchanges.
As compared to 59 commodities in January 2005, 94 commodities were
traded in December 2006 in the commodity futures market. These
commodities included major agricultural commodities such as rice,
wheat, jute, cotton, coffee, major pulses (such as urad, arahar and
chana), edible oilseeds (such as mustard seed, coconut oil, groundnut oil
and sunflower), spices (pepper, chillies, cumin seed and turmeric),
metals (aluminium, tin, nickel and copper), bullion (gold and silver),
crude oil, natural gas and polymers, among others. Gold accounted for
the largest share of trade in terms of value. A temporary ban was
imposed on futures trading in urad and tur dal in January 2007 to
ensure orderly market conditions. An efficient and well-organised
commodities futures market is generally acknowledged to be helpful in
price discovery for traded commodities.

51

COMMODITIES TRADED
World-over one will find that a market exits for almost all the
commodities known to us. These commodities can be broadly classified
into the following:

Aluminium, Copper, Lead, Nickel, Sponge

METAL

Iron, Steel Long (Bhavnagar), Steel Long

(Govindgarh), Steel Flat, Tin, Zinc

BULLION

FIBER

ENERGY

SPICES

PLANTATIONS

Gold, Gold HNI, Gold M, i-gold, Silver,

Silver HNI, Silver M
Cotton L Staple, Cotton M Staple, Cotton S
Staple, Cotton Yarn, Kapas
Brent Crude Oil, Crude Oil, Furnace Oil,
Natural Gas, M. E. Sour Crude Oil
Cardamom, Jeera, Pepper, Red Chilli,
Turmeric
Arecanut, Cashew Kernel, Coffee
(Robusta), Rubber

52

PULSES

Chana, Masur, Yellow Peas

PETROCHEMICALS HDPE, Polypropylene(PP), PVC

Castor Oil, Castor Seeds, Coconut Cake,
Coconut Oil, Cotton Seed, Crude Palm Oil,
Groundnut Oil, KapasiaKhalli, Mustard Oil,
OIL & OIL SEEDS

Mustard Seed (Jaipur), Mustard Seed

(Sirsa), RBD Palmolein, Refined Soy Oil,
Refined Sunflower Oil, Rice Bran DOC,
Rice Bran Refined Oil, Sesame Seed,
Soymeal, Soy Bean, Soy Seeds

CEREALS

Maize
Guargum, Guar Seed, Gurchaku, Mentha

OTHERS

Oil, Potato (Agra), Potato (Tarkeshwar),

Sugar M-30, Sugar S-30

BENEFITS OF COMMODITY FUTURES MARKETS

The primary objectives of any futures exchange are authentic price
discovery and an efficient price risk management. The beneficiaries
include those who trade in the commodities being offered in the
exchange as well as those who have nothing to do with futures trading. It
is because of price discovery and risk management through the existence
of futures exchanges that a lot of businesses and services are able to
function smoothly.
53

1. Price Discovery:-Based on inputs regarding specific market

information, the demand and supply equilibrium, weather forecasts,
expert views and comments, inflation rates, Government policies,
market dynamics, hopes and fears, buyers and sellers conduct
trading at futures exchanges. This transforms in to continuous price
discovery mechanism. The execution of trade between buyers and
sellers leads to assessment of fair value of a particular commodity
that is immediately disseminated on the trading terminal.
2.

Price Risk Management: - Hedging is the most common method

of price risk management. It is strategy of offering price risk that is

inherent in spot market by taking an equal but opposite position in the
futures market. Futures markets are used as a mode by hedgers to
protect their business from adverse price change. This could dent the
profitability of their business. Hedging benefits who are involved in
trading of commodities like farmers, processors, merchandisers,
manufacturers, exporters, importers etc.
3.

Import- Export competitiveness: - The exporters can hedge

their price risk and improve their competitiveness by making use of

futures market. A majority of traders which are involved in physical
trade internationally intend to buy forwards. The purchases made from
the physical market might expose them to the risk of price risk resulting
to losses. The existence of futures market would allow the exporters to
hedge their proposed purchase by temporarily substituting for actual
purchase till the time is ripe to buy in physical market. In the absence of
futures market it will be meticulous, time consuming and costly physical
transactions.
54

4.

Predictable Pricing: - The demand for certain commodities is

highly price elastic. The manufacturers have to ensure that the prices
should be stable in order to protect their market share with the free entry
of imports. Futures contracts will enable predictability in domestic
prices. The manufacturers can, as a result, smooth out the influence of
changes in their input prices very easily. With no futures market, the
manufacturer can be caught between severe short-term price movements
of oils and necessity to maintain price stability, which could only be
possible through sufficient financial reserves that could otherwise be
utilized for making other profitable investments.
5.

Benefits for farmers/Agriculturalists: - Price instability has a

direct bearing on farmers in the absence of futures market. There would

be no need to have large reserves to cover against unfavorable price
fluctuations. This would reduce the risk premiums associated with the
marketing or processing margins enabling more returns on produce.
Storing more and being more active in the markets. The price
information accessible to the farmers determines the extent to which
traders/processors increase price to them. Since one of the objectives of
futures exchange is to make available these prices as far as possible, it is
very likely to benefit the farmers. Also, due to the time lag between
planning and production, the market-determined price information
disseminated by futures exchanges would be crucial for their production
decisions.
6.

Credit accessibility: - The absence of proper risk management

tools would attract the marketing and processing of commodities to

high-risk exposure making it risky business activity to fund. Even a
55

small movement in prices can eat up a huge proportion of capital owned

by traders, at times making it virtually impossible to payback the loan.
There is a high degree of reluctance among banks to fund commodity
traders, especially those who do not manage price risks. If in case they
do, the interest rate is likely to be high and terms and conditions very
stringent. This posses a huge obstacle in the smooth functioning and
competition of commodities market. Hedging, which is possible through
futures markets, would cut down the discount rate in commodity
lending.
7.

Improved product quality: - The existence of warehouses for

facilitating delivery with grading facilities along with other related

benefits provides a very strong reason to upgrade and enhance the
quality of the commodity to grade that is acceptable by the exchange. It
ensures uniform standardization of commodity trade, including the
terms of quality standard: the quality certificates that are issued by the
exchange-certified warehouses have the potential to become the norm
for physical trade.

56

Derivatives Market

A derivative is a financial product which has been derived from another

financial product or commodity.
57

D.G. Gardener defined the derivatives as A derivative is a financial

product which has been derived from market for another product.The
securities contracts (Regulation) Act 1956 defines derivative as under
section 2(ac).As per this Derivative includes
(a) a security derived from a debt instrument, share, loan whether
secured or unsecured, risk instrument or contract for differences or any
other form of security.
(b) a contract which derived its value from the price, or index of prices
at underlying securities.
The above definition conveys that the derivatives are financial products.
Derivative is derived from another financial instrument/ contract called
the underlying. A derivative derives its value from underlying assets.
Accounting standard SFAS133 defines a derivative as a derivative
instrument is a financial derivative or other contract will all three of the
following characteristics:
(i) It has (1) one or more underlying, and (2) one or more notional
amount or payments provisions or both. Those terms determine the
amount of the settlement or settlements.
(ii) It requires no initial net investment or an initial net investment that
is smaller than would be required for other types of contract that would
be expected to have a similar response to changes in market factors.
(iii) Its terms require or permit net settlement. It can be readily settled
net by a means outside the contract or itprovides for delivery of an asset
that puts the recipients in a position not substantially different from net
settlement.From the aforementioned, derivatives refer to securities or to
contracts that derive from another whose value depends on another
58

contract or assets. As such the financial derivatives are financial

instrument whose prices or values are derived from the prices of other
underlying financial instruments or financial assets. The underlying
instruments may be an equity share, stock, bond, debenture, treasury
bill, foreign currency or even another derivative asset.Hence, financial
derivatives are financial instruments whose prices are derived from the
prices of other financial instruments.

1. Management of risk : One of the most important services provided by

the derivatives is to control, avoid, shift and manage efficiently different
types of risk throughvarious strategies like hedging, arbitraging,
spreading etc. Derivative assist the holders to shift or modify suitable the
risk characteristics of the portfolios. These are specifically useful in
highly volatile financial conditions like erratic trading, highly flexible
interest rates, volatile exchange rates and monetary chaos.
2. Measurement of Market: Derivatives serve as the barometers of the
future trends in price which result in the discovery of new prices both on
the spot and future markets. They help in disseminating different
information regarding the future markets trading of various
commodities and securities to the society which enable to discover or
form suitable or correct or true equilibrium price in the markets. As a
result, they assets in appropriate and superior allocation of resources in
the society.
3. Efficiency in trading: Financial derivatives allow for free trading of
risk components and that leads to improving market efficiency. Traders
can use a position in one or more financial derivatives as a substitute for
a position in underlying instruments. In many instances, traders find
financial derivatives to be a more attractive instrument than the
59

underlying security. This is mainly because of the greater amount of

liquidity in the market offered by derivatives as well as the lower
transaction costs associated with trading a financial derivative as
compared to the costs of trading the underlying instruments in cash
market.
4. Speculation and arbitrage : Derivatives can be used to acquire risk,
rather than to hedge against risk. Thus, some individuals and
institutions will enter into a derivative contract to speculate on the value
of the underlying asset, betting that the party seeking insurance will be
wrong about the future value of the underlying asset. Speculators look to
buy an asset in the future at a low price according to a derivative contract
when the future market price is high, or to sell an asset in the future at a
high price according to derivative contract when the future market price
is low. Individual and institutions may also look for arbitrage
opportunities, as when the current buying price of an asset falls below
the price specified in a futures contract to sell the asset.
5. Price discovery : The important application of financial derivatives is
the price discovery which means revealing information about future cash
market prices through the future market. Derivative markets provide a
mechanism by which diverse and scattered opinions of future are
collected into one readily discernible number which provides a
consensus of knowledgeable thinking.
6. Hedging : Hedge or mitigate risk in the underlying, by entering into a
derivative contract whose value moves in the opposite direction to their
underlying position and cancels part or all of it out. Hedging also occurs
when an individual or institution buys an asset and sells it using a future
contract. They have access to the asset for a specified amount of time,
and can then sell it in the future at a specified price according to the
60

futures contract of course, this allows them the benefit of holding the
asset.
7. Price stabilization function : Derivative market helps to keep a
stabilizing influences on spot prices by reducing the short term
fluctuations. In other words, derivatives reduces both peak and depths
and lends to price stabilization effect in the cash market for underlying
asset.
8. Gearing of value : Special care and attention about financial
derivatives provide leverage (or gearing), such that a small movement in
the underlying value can cause a large difference in the value of the
derivative.
9. Develop the complete markets : It is observed that derivative trading
develop the market towards complete markets complete market
concept refers to that situation where no particular investors be better of
than others, or patterns of returns of all additional securities are
spanned by the already existing securities in it, or there is no further
scope of additional security.
10. Encourage competition : The derivatives trading encourage the
competitive trading in the market, different risk taking preference at
market operators like speculators, hedgers, traders, arbitrageurs etc.
resulting in increase in trading volume in the country. They also attract
young investors, professionals and other experts who will act as catalysts
to the growth of financial market.
11. Liquidity and reduce transaction cost : As we see that in derivatives
trading no immediate full amount of the transaction is required since
most of them are based on margin trading. As a result, large number of
traders, speculators, arbitrageurs operates in such markets. So,
61

derivatives trading enhance liquidity and reduce transaction cost in the

markets of underlying assets.

Derivative markets in India have been in existence in one form or the

other for a long time. In the area of commodities, the Bombay Cotton
Trade Association started future trading way back in 1875. This was the
first organized futures market. Then Bombay Cotton Exchange Ltd. in
1893, Gujarat VyapariMandall in 1900, Calcutta Hesstan Exchange Ltd.
in 1919 had started future market.
After the country attained independence, derivative market came
through a full circle from prohibition of all sorts of derivative trades to
their recent reintroduction. In 1952, the government of India banned
cash settlement and options trading, derivatives trading shifted to
informal forwards markets. In recent years government policy has
shifted in favour of an increased role at market based pricing and less
suspicious derivatives trading. The first step towards introduction of
financial derivatives trading in India was the promulgation at the
securities laws (Amendment) ordinance 1995. It provided for withdrawal
at prohibition on options in securities. The last decade, beginning the
year 2000, saw lifting of ban of futures trading in many commodities.
Around the same period, national electronic commodity exchanges were
also set up. The more detail about evolution of derivatives are shown in
table No.1 with the help of the chronology of the events. This table is
presenting complete historical developments
62

The NSE and BSE are two major Indian markets have shown a
remarkable growth both in terms of volumes and numbers of traded
contracts. Introduction of derivatives trading in 2000, in Indian markets
was the starting of equity derivative market which has registered on
explosive growth and is expected to continue the same in the years to
come. NSE alone accounts 99% of the derivatives trading in Indian
markets. Introduction of derivatives has been well received by stock
market players. Derivatives trading gained popularity after its
introduction in very short time.If we compare the business growth of
NSE and BSE in terms of number of contracts traded and volumes in all
product categories with the help of table no.4, table no.5 and table no.12
which shows the NSE traded 636132957 total contracts whose total
turnover is Rs.16807782.22 cr in the year 2012-13 in futures and options
segment while in currency segment in 483212156 total contracts have
traded whose total turnover is Rs.2655474.26 cr in same year.In case of
BSE the total numbers of contracts traded are 150068157 whose total
turnover is Rs.3884370.96 Cr in the year 2012-13 for all segments. In the
above case we can say that the performance of BSE is not encouraging
both in terms of volumes and numbers of contracts traded in all product
categories. The table no.4, table no.5 and table no.12 summarily specifies
the updated figures since 2003-04 to 2012-13 about number of contracts
traded and total volumes in all segments

1952 - Enactment of the forward contracts (Regulation) Act.

1953 - Setting up of the forward market commission.
1956- Enactment of SCRA
1969 -Prohibition of all forms of forward trading under section 16
of SCRA.

63

1972 -Informal carry forward trades between two settlement cycles

began on BSE.
1980-Khuso Committee recommends reintroduction of futures in
most commodities.
1983- Govt. ammends bye-laws of exchange of Bombay, Calcutta
and Ahmedabad and introduced carry forward trading in specified
shares.
1992 -Enactment of the SEBI Act.
1993 -SEBI Prohibits carry forward transactions.
1994 -Kabra Committee recommends futures trading in 9
commodities.
1995- G.S. Patel Committee recommends revised carry forward
system.
14th Dec. 1995 NSE asked SEBI for permission to trade index
futures
1996 -Revised system restarted on BSE.
18th Nov. 1996- SEBI setup LC Gupta committee to draft frame
work for index futures
11th May 1998- LC Gupta committee submitted report
1st June 1999- Interest rate swaps/forward rate agreements
allowed at BSE
7th July 1999- RBI gave permission to OTC for interest rate
swaps/forward rate agreements
24th May 2000 - SIMEX chose Nifty for trading futures and
options on an Indian index
25th May 2000- SEBI gave permission to NSE & BSE to do index
futures trading
9th June 2000-Equity derivatives introduced at BSE
12th June 2000- Commencement of derivatives trading (index
futures) at NSE
31st Aug. 2000-Commencement of trading futures & options on
Nifty at SIMEX
1st June 2001-Index option launched at BSE
64

Jun 2001- Trading on equity index options at NSE

July 2001 -Trading at stock options at NSE
9th July 2001-Stock options launched at BSE
July 2001 -Commencement of trading in options on individual

securities
1st Nov. 2001-Stock futures launched at BSE
Nov. 2001 -Commencement of trading in futures on individual

security
9th Nov. 2001-Trading of Single stock futures at BSE
June 2003 -Trading of Interest rate futures at NSE
Aug. 2003- Launch of futures & options in CNX IT index
13th Sep. 2004-Weekly options of BSE
June 2005 -Launch of futures & options in Bank Nifty index
Dec. 2006 '-Derivative Exchange of the Year by Asia risk magazine
June 2007 -NSE launches derivatives on Nifty Junior & CNX 100
Oct. 2007- NSE launches derivatives on Nifty Midcap -50
1st Jan. 2008-Trading of Chhota (Mini) Sensex at BSE
1st Jan. 2008-Trading of mini index futures & options at NSE
3rd March 2009-Long term options contracts on S&P CNX Nifty
index
NA Futures & options on sectoral indices ( BSETECK, BSE FMCG,

BSE Metal, BSE Bankex

& BSE oil & gas)
29th Aug. 2008-Trading of currency futures at NSE
Aug. 2008- Launch of interest rate futures
1st Oct. 2008-Currency derivative introduced at BSE
10th Dec. 2008-S&P CNX Defty futures & options at NSE
Aug. 2009- Launch of interest rate futures at NSE
7th Aug. 2009-BSE-USE form alliance to develop currency &

interest rate derivative markets

18th Dec. 2009-BSE's new derivatives rate to lower transaction
costs for all
Feb. 2010- Launch of currency future on additional currency pairs
at NSE
Apr. 2010 -Financial derivatives exchange award of the year by
Asian Banker to NSE
65

July 2010- Commencement trading of S&P CNX Nifty futures on

CME at NSE
Oct. 2010- Introduction of European style stock option at
NSEJournal of Business Management & Social Sciences Research
(JBM&SSR) ISSN No: 2319-5614
Oct. 2010 -Introduction of Currency options on USD INR by NSE
July 2011- Commencement of 91 day GOI trading Bill futures by
NSE
Aug. 2011 -Launch of derivative on Global Indices at NSE
Sep. 2011- Launch of derivative on CNX PSE & CNX infrastructure
Indices at NSE
30th March 2012-BSE launched trading in BRICSMART indices
derivatives

Insurance Market

66

Indian Insurance Industry has got the deep-rooted history. These

evidences are from the writings of Manu (Manusmrithi), Yagnavalkya
(Dharmasastra) and Kautilya (Arthasastra). The writings speak about
pooling of resources that could be re-distributed in times of calamities
such as fire, floods, epidemics and famine. Ancient Indian history has
preserved the very earliest traces of insurance in the form of marine
trade loans and carriers contracts. In India the Insurance has evolved
over time heavily drawing from other countries, England particularly.

In India the advent of Life Insurance started in the year 1818 with the
establishment of the Oriental Life Insurance Company in Calcutta. In the
year 1829, the Madras Equitable had began the life insurance business in
the Madras Presidency. British Insurance Act enactment was done in the
year 1870. In the last three decades of the nineteenth century, the
Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were
started in the Bombay Residency. This era, however, was dominated by
foreign insurance offices which did good business in India, namely
Albert Life Assurance, Royal Insurance, Liverpool and London Globe

67

Insurance and the Indian offices were up for hard competition from the
foreign companies.
History of general insurance was during the 17th century to the
Industrial Revolution in the west and the consequent growth of seafaring trade and commerce in the 17th century. The General Insurance
has its roots in the year 1850 in Calcutta from the establishment of
Triton Insurance Company Ltd., by British. The Indian Mercantile
Insurance Ltd was set up in the year 1907. As this was the first company
to transact all classes of general insurance business. In the year 1957
General Insurance Council, a wing of the Insurance Association of India
was established.
With the emergence of growing demand for insurance, more and more
insurance companies are now emerging in the Indian Insurance
Industry. With the opening up of the economy, there are several
international leaders in the insurance of India are trying to venture into
the India insurance industry. In the year 1993, Malhotra Committee was
formed which initiated reforms in the Indian Insurance Industry. The
aim of which was to assess the functionality of the industry. It was
incharge of recommending the future path of insurance in India.It even
attempted to improve various aspects, making them more appropriate
and effective for the Indian market.
In the year 1999 The Insurance Regulatory and Development Authority
Act was formulated which brought about several crucial policy changes
in the India. In 2000 it led to the formation of the Insurance Regulatory
and Development Authority. The goals of IRDA are to safeguard the
interests of insurance policyholders, as well as to initiate different policy
measures to help sustain growth in the industry. This Authority has
68

notified 27 Regulations on various issues like Registration of Insurers,

Regulation on insurance agents, Re-insurance, Solvency Margin,
Obligation of Insurers to Rural and Social sector, Investment and
Accounting Procedure, Protection of policy holders' interest, etc.
Indian Insurance Industry is flourishing with several national and
international players competing and growing at rapid rates. The success
comes usually from the easing of policy regulations, and India has
become more familiar with different insurance products and the period
from 2010 - 2015 is projected to be the 'Golden Age' for the Indian
insurance industry.
Indian Insurance companies today offer a comprehensive range of
insurance plans, a range which is growing as the economy matures and
the wealth of the middle classes increases. The most common types of
insurance includes: term life policies, endowment policies, joint life
policies, whole life policies, loan cover term assurance policies, unitlinked insurance plans, group policies, pension plans, and annuities.
Those like the General insurance plans are also available to cover motor
insurance, home insurance, travel insurance and health insurance.

Types of Insurance
1. Life Insurance is all about guaranteeing a specific sum of money to
a designated beneficiary upon the death of the insured, or to the
insured if he or she lives beyond a certain age.
2. Health Insurance - it is Insurance against expenses incurred
through illness of the insured or the person who takes up the
insurance.

69

3. Liability Insurance usually insures property such as automobiles,

property and professional/business mishaps and others.

Latest developments
In November 2009 According to the industry body report
publication, the medical insurance sector would account for US$ 3
billion in the next three years.
In the year 2008-09 the IRDA in its annual report said that the
Health insurance premium collections touched US$ 1.45 billion
compared with US$ 1.13 billion in the previous year.
Further in 2009 the total premium between April and December
was US$ 1.35 billion, up from US$ 1.12 billion, an increase of 20 %,
as per figures released by the regulator.
According to IRDA guidance note released by IRDA, the regulator
has increased the lock-in period for all unit-linked insurance plans
(ULIPS) to five years from the current three years, which makes
them long-term financial instruments and provide risk protection.
The commission and expenses have also been reduced by evenly
distributing them throughout the lock-in period.
In the year 2010-2011 The Indian insurance unit of Dutch financial
services firm ING plans to invest US$ 51 million to fund expansion
in the country. 100 branches will be opened by Private life insurer
Future General India will expand its distribution network in
addition to its existing network of 91 branches during 2010. There

70

will also be increase in the agency force by 21,000 to 65,000

people.
In next five year Max Groups to invest a further US$ 134.9 Million
by Max Buda, the health insurance JV between UK's Buda. Besides
the existing six cities, it plans to open up into Surat, Jaipur and
Ludhiana by the end of 2010.

The total market size of the insurance sector in India was US$ 66.4
billion in FY 13. It is projected to touch US$ 350-400 billion by 2020.
India was ranked 10th among 147 countries in the life insurance business
in FY 13, with a share of 2.03 per cent. The life insurance premium
market expanded at a CAGR of 16.6 per cent from US$ 11.5 billion to
US$ 53.3 billion during FY 03-13. The non-life insurance premium
market also grew at a CAGR of 15.4 per cent in the same period, from
US$ 3.1 billion to US$ 13.1 billion.
Digital@Insurance-20X By 2020, by Boston Consulting Group (BCG)
and Google India forecasts that insurance sales from online channels will
grow 20 times from present day sales by 2020, and overall internet
influenced sales will touch Rs 300,000-400,000 crore (US$ 49.63-66.18
billion).
Investment corpus in India's pension sector is projected to cross US$ 1
trillion by 2025, following the passage of the Pension Fund Regulatory
and Development Authority (PFRDA) Act 2013, as per a joint report by
CII-EY on Pensions Business in India.

71

Government Initiatives
The Union Budget 201 4-15 increased the FDI limit in insurance to 49
per cent. The increase in the FDI limit could help the insurance industry
in two ways. One, this could help companies access capital more easily
and, two, it could act as a trigger for listing of insurance players, which
will offer a better benchmark to value these companies.
In a bid to facilitate banks to provide greater choice in insurance
products through their branches, a proposal could be made which will
allow banks to act as corporate agents and tie up with multiple insurers.
A committee established by the Finance Ministry of India is likely to
suggest this model as an alternative to the broking model.

Road Ahead
The future of India's insurance sector looks good, driven by the country's
favourable demographic, greater awareness, supportive government
which enacts policies that improve business, customer-centric products,
and practices that give businesses the best environment to grow. India's
insurable population is anticipated to touch 75 crore in 2020, with life
expectancy reaching 74 years. Life insurance is projected to comprise 35
per cent of total savings by the end of this decade, compared to 26 per
cent in 2009-10.

72

Problems with the Indian Financial Market

The Indian stock markets till date have remained stagnant due to the
rigid economic controls. It was only in 1991, after the liberalization
process that the India securities market witnessed a flurry of IPOs
serially.

India embarked on substantial economic liberalization in 1991. In the

field of finance, the major themes were the scaling back of capital
controls and the fostering of a domestic financial system. This was part
of a new framework of embracing globalization and of giving primacy to
market-based mechanisms for resource allocation.
From 1991 to 2002, progress was made in four areas, reflecting the
shortcomings that were then evident. First, capital controls were reduced
substantially to give Indian firms access to foreign capital and to build
nongovernment mechanisms for financing the current account deficit.
Second, a new defined-contribution pension system, the New Pension
System, was set up so that the young population could achieve
significant pension wealth in advance of demographic transition. Third,
a new insurance regulator, the Insurance Regulation and Development
Agency, was set up, and the public sector monopolies in the field of
insurance were broken to increase access to insurance. Fourth and most
important, there was a significant burst of activity in building the equity
market because of the importance of equity as a mechanism for financing
firms and the recognition of infirmities of the equity market. This
involved establishing a new regulator, the Securities and Exchanges
73

Board of India, and new infrastructure institutions, the National Stock

Exchange and the National Securities Depository. The reforms of the
equity market involved ten acts of parliament and one constitutional
amendment, indicative of the close linkage between deeper economic
reforms and legislative change.
While all these moves were in the right direction, they were inadequate.
A large number of problems with the financial system remain
unresolved. In cross-country rankings of the capability of financial
systems, India is typically found in the bottom quartile of countries. A
financial system can be judged on the extent to which it caters to growth,
stability, and inclusion, and the Indian system is deficient on all of those
counts. By misallocating resources, it hampers growth. The entire
financial system suffers from high systemic risk.
The households and firms of India are extremely diverse, and often have
characteristics not seen elsewhere in the world. For finance to reach a
large fraction of firms and households, financial firms need to
energetically modify their products and processes, and innovate to
discover how to serve customers. But in the field of finance, the forces of
competition and innovation have been blocked by the present policy
framework. This means there are substantial gaps between the products
and processes of the financial system, and the needs of households and
firms.
It is likely that around 2053, Indias GDP will exceed that of the United
States as of 2013. In the coming forty years, India will need to build up
the institutional machinery for markets as complex as the financial
system seen in advanced economies today. The IFC puts India on that
path.
74

Solutions
By 2004, it was becoming increasingly clear that while some elements of
modernization of the financial system had taken place from 1992 to
2004, financial economic policy needed to be rethought on a much larger
scale to address the problems facing the system. As is the convention in
India, the consensus on desired reforms was constructed through reports
from four expert committees on:
1.

International finance, led by Percy Mistry in 2007

2.

Domestic finance, led by Raghuram Rajan in 2008

3.

Capital controls, led by U. K. Sinha in 2010

4.

Consumer protection, led by DhirendraSwarup in 2010

These four reports add up to an internally consistent and comprehensive

framework for Indian financial reforms. The findings were widely
discussed and debated in the public discourse (see table 1 for the main
recommendations of these expert committees). The four reports
diagnosed problems, proposed solutions, and reshaped the consensus.

75

Primary Data
76

I spoke to close relatives who have had experience with the financial
markets. They have seen the Indian markets transform from the 1980s
till the current day.

Q. What were the markets like in the 1980s as compared to the current
day?
A. In the 1980s there was much less use of technology. The open outcry
was still in existence which made the market place really chaotic. Now
everything is computarised therefore making trading much more
convenient and also removing the chances of human error.
Q. How has globalization affected the markets?
A. The SEBI has taken many efforts to remove restrections on foreign
players entering the markets. There are less issues when it comes to
FDIs and FFIs and thus the Indian forex market has boomed and it has
also made India a very well recognized economy in the world. Foreign
investors realize that there is no better place to invest as the Indian
economy is on the massive rise and seems that it will continue this trend.

Q. Have you noticed any change in the way investors trade due to the
changes made by the government?
A. The government has introduced many methods via which companies
are required to be more transparent and hence they have to reveal their
financials in a more detailed way. This has helped investors to change
their method of analysis from technical to fundamental thus helping
investors make decisions on number which always proves to be a more
informed decision.
77

Q. The value of securities traded has obviously gone up from back in the
day. Did you expect such a massive increase in the volume of trade?
A. To be honest, this increse in trade does not come as a shock to me
because of the various ammendments made in the different markets. All
these changes made have been positive ones and were designed in a way
to increase the value of securities traded. I would be more taken aback if
the volume of trade had not been as much as it is today.

78

79

80

81

82

83

Conclusion

The Indian Financial System has been in existence for centuries. From
the existence of barter trading to trading with gold to the current high
tech modes of e-finacining and trading. The current heights that the
Indian Fiancial System has reached have obviously not been attained
overnight. As the popular saying goes Rome wasnt built in a day in the
same way the Indian Financial Markets have gradually expanded and
improved step by step. This project clearly outlines the strides that have
been taken by the government and the financial instituitions to improve
and modernize the markets. The numbers that have been given in the
project are a clear proof of the positive changes that have been made. If
the trend that has been set in the last 35 years or so continues in the
years to come then truly the sky is the limit for the Indian economy. The
improvement of technology and enactment of new acts has set the
economy in the right direction and the only direction is upwards. The
main markets that have been covered in the project are :

Capital Markets: Stock markets and Bond markets

Commodity Markets

Money Markets

Derivatives Markets: Futures Markets

Insurance Markets

Foreign Exchange Markets

84

The resesarch methods that I have used also reiterate my faith in the
indian economy. As a youth of the nation I know that India is headed in
the right direction and I can feel safe in this nation. The above
mentioned markets are the main places where investments take place.

The seeds have been sown years back and with the introduction of the
new government and the imrpovement of technology and awareness of
the investors increasing, our nation seems destined for economic
stability and greatness!

85

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