Indian Financial System

Indian Financial System

• Indian Financial System is a system in which People, Financial Institutions, Banks, Industrial Companies and the Government demand for fund and the same is supplied to them.
• There are two parts of Indian Financial System-first demand side and second supply side. The representative of demand side can be Individual investor, Industrial and Business Companies, Government etc and the representative of supply side will be Banks, Insurance Companies, Mutual Fund and other Financial Institutions.
• The Indian financial system, which refers to the borrowing and lending of funds or to the demand for and supply of funds of all individuals, institutions, companies and of the Government consists of two parts, viz., the Indian money market and the Indian capital market.
• The Indian money market is the market in which shortterm funds are borrowed and lent. The capital market in India, on the other hand, is the market for mediumterm and long-term funds.
• The Indian financial system performs a crucial role in economic development of India through saving-investment process, also known as capital formation.
• The financial system is commonly, classified into: 1. Industrial finance, 2. Agricultural finance, 3.      Development finance and 4. Government finance.
• Devaluation means lowering the official value of the local money in terms of foreign currency or gold.
• Balance of Payments (BoP) is a systematic record of all the economic transactions between one country and the rest of the world in a given period.
• BoP is divided in current account and capital account.
• Balance of Trade (BoT) is the difference between the value of goods exported and the value of goods imported per annum. Services not included in BoT.
• EXIM Policy 2000-01 introduced Special Economic Zones (SEZ) Scheme.
• 1994-95, Indian Rupee was made fully convertible on current account.
• Fiscal Policy is the policy relating to public revenue and public expenditure and allied matters.
• Usually, the Indian money market is classified into organised sector and the unorganised sector.
• The unorganised sector consists of indigenous bankers including the Non-Banking Financial Companies (NBFCs). Besides, these two, there are many sub-markets in the Indian money market.
• The organised banking system in India can be broadly divided into three categories, viz., the central bank of the country known as the Reserve Bank of India, the commercial banks and the co-operative banks which includes private sector and public sector banks and also foreign banks.
• The highest financial institution in organized sector is Reserve Bank of India and in addition to this Banks of Public Sector, Banks of Private Sector, Foreign Banks and other financial institutions is also part of organized sector.

Reserve Bank of India

• The Reserve Bank of India regulates and controls the money of the country.
• The RBI was established under the Reserve Bank of India Act, 1934 on 1st April, 1935 with a capital of Rs. 5 crore. It was nationalised on 1st January, 1949; on the recommendation of Parliamentary Committee in 1948. It is the Central Bank of India.
• The Reserve Bank of India is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all commercial banks and hence is known as the 'Reserve Bank'. Its financial year is 1st July to 30th June.

The Indian Capital Market

• The Indian capital market is the market for longterm capital (or loans); it refers to all the facilities and institutional arrangements for borrowing and lending 'term funds'— medium term and long term funds.
• The Capital Market in India includes:

1. Government Securities (Gilt-edged market)

2. Industrial Securities Market

3 Development financial institutions like IFCI, IDBI, ICICI, SFCs, IIBI, UTI etc

4. Financial Intermediaries like Merchant banks.

• Individuals who invest directly on their own in securities are also supplier of fund to capital market. The trend in the capital market is basically affected by two important factors :

1. Operations of the institutional investors in the market and;

2. The excellent results flowing in from the corporate sector.

Important Share Price Index of the World

• The capital market in India can be classified into:

(i) Gilt-edged market or market for Government and semi-government securities;

(ii) Industrial securities market;

(iii) Development financial institutions and

(iv) Non-banking financial companies.

• The gilt-edged securities market is the market for Government and Semi government securities which carry fixed interest rates.
• The industrial securities market is the market for equities and debentures of companies of the corporate sector. This market is further classified into— 
  a. New issue markets for raising fresh capital in the form of shares and debentures (commonly referred to as primary market), and
  b. Old issues market (or secondary market) for buying or selling shares and debentures of existing companies— this market is commonly referred to as the stock market or stock exchange.
• If shares or debentures of private corporations, primary sureties of government companies or new sureties and issue of bonds of public sector are sold or purchased in the capital market, then the market is called Primary Capital Market.
• Secondary Market includes transactions in the stock exchange and gilt-edged market.
• Merchant Bank, Mutual Fund, Leasing Companies, Risk Capital Companies etc. collect and invest public money into the capital market.
• Unit Trust of India (UTI) is the biggest Mutual Fund Institution of India.

Stock Exchange

• The stock exchange is the market for buying and selling of stocks, shares, securities, bonds and debentures etc. It increases the market ability of existing securities by providing simple method for public and others to buy and sell securities.
• The first organised stock exchange in India was started in Bombay (now Mumbai), when the 'Native Share Brokers' Association' known as the Bombay Stock Exchange (BSE) was formed by the brokers in 1875. BSE is Asia's oldest stock exchange.

• In 1894, the Ahmedabad Stock Exchange was started to facilitate dealings in the shares of textile mills there.
• The Calcutta Stock Exchange was started in 1908 to provide a market for shares of plantations and jute mills. The number of stock exchanges rose from 7 in 1939 to 21 in 1945.
• Under the securities contract (Regulation) Act of 1956, the Government of India has so far recognised 23 stock exchanges. Bombay is the premier exchange in the country.
• With the setting up of National Stock Exchange, all regional stock exchanges have lost relevance.
• The BSE transformed itself into a corporate entity from being a brokers association, from the middle of August 2005.

Regulator in India (As on 22.09.2022)

• As a public limited company, BSE (Bombay Stock Exchange) is obliged to dilute stock brokers stake to 49%.
• To prevent excessive speculation and volatility in the stock market SEBI has introduced rolling settlements from July 2, 2001, under which settlement has to be made everyday.

Some Important Share Price Index of India

• BSE SENSEX This is the most sensitive share index of the Mumbai Stock Exchange. This is the representative index of 30 main shares. Its base year is 1978-79. BSE is the oldest stock exchange of India, founded in 1875.
• BSE 200: This represents 200 shares of Mumbai Stock Exchange. Its base year is 1989-90.
• DOLLEX: Index of 200 BSE Dollar Value Index is called DOLLEX. Its base year is 1989-90.
• NSE-50: From 28^th July, 1998, its name is S and P CNX Nifty. National Stock Exchange has launched a new share Price Index, NSE-50 in place of NSE-100 in April 1996. NSE-50 includes 50 companies shares. This stock exchange was founded on Ferwani Committee's recommendation in 1994.
• CRISIL, set up in 1988, is a credit rating agency. It undertakes the rating fixed deposit programmes, convertible and non-convertible debentures and also credit assessment of companies.
• CRISIL 500 is the new share Price Index introduced by Credit Rating Agency the 'Credit Rating Information Services of India Limited' (CRISIL) on January 18,1996.
• The National Stock Exchange (NSE) has launched a new version of its online trading software called 'National Exchange for Automatic Trading' (NEAT).

Ranking of India in Different Indexes (As on 22.09. 2022)

1. In Edelman Trust Barometer-2021, India ranked 1st and China second.

2. Transparency International India (TII)-Global Corruption Perception Index-2021 India ranked 85th among 180 countries (Denmark, New Zealand Topped).

3. World Bank's 'Ease of Doing Business' Report (2020) - India ranked 63^rdamong the 190 countries (New Zealand Top, followed by Singapore).

4. World Economic Forum's 2022 Gender Gap Index - India 135^th (Iceland top, Afghanistan last).

5. Global Hunger Index Report 2021 - India ranked 101^stamong 116 countries. (Yemen ranked 115^th, followed by Samolia 116th).

6. Human Development Index 2021-22 - India ranked 132 among in the list of 191 countries (Switzerland top).

7. World Press Freedom Index 2022 - India ranked 150 in the list of 180 countries (Norway top, North Korea last).

8. Global Peace Index 2022 - India ranked 135th out of 163 countries (Iceland top, Afghanistan is the least peaceful place).

9. Global Innovation Index 2021 - India ranked 46th, out of 131 countries (Switzerland top).

10. World Happiness Report 2022 - India ranked 136th out of 146 countries (Finland top and Afghanistan last).