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Introduction to Indian Financial Markets

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Any country to grow economically requires ..

a well-developed financial market

for access to resources and

for wider participation in the benefits of growth.

Examples of *Financial markets* are ..

Securities market

Commodity market

Forex market

Insurance market

Pension market etc.

The *function of the financial markets* is to ensure that ..

the economic activity is enabled by providing access of funds ..

to those that need it for consumption or productive activity.

Indian Financial Markets

Broadly speaking, there are two *segments* in the financial market.

The financial market comprises of the

  • money markets* that deal with the short-term lending and borrowing of funds and

the *securities or capital markets* that enable longer term transfer of funds using debt and equity instruments.

The financial market is not just provider of funds..

but also liquidity and exit options for the participants.

Now, let us see the structure of the financial markets in the Indian context

Banking system

The *banking system* acts as the intermediary to channel funds to economic enterprises.

Banks also provide a secure system for settling financial transactions.

RBI is the *regulator of the banking sector*.

It is the bank licensing and note-issuing authority.

It also controls the credit and monetary activities in the economy.

For example, in the controller role, RBI controls..

Statutory Liquidity Ratio (SLR)

Cash Reserve Ratio (CRR) and

other selective credit controls.

RBI also transacts and regulates the foreign exchange market.

Apart from RBI, there are few other regulators..

  • EXIM Bank* fosters the growth of export and import activities.
  • NABARD* caters to the need of rural based development
  • National Housing Bank (NHB)* regulates the housing sector of the economy

Securities Market

The *securities market* provides the structure for businesses to raise funds through the issue of securities.

Two segments in this:

1. The *primary market*, also called the new issue market,

is where issuers raise capital by issuing securities to investors.

2. The *secondary market*, also called the stock exchange,

facilitates trade in already-issued securities.

The stock market is a very busy place.

So many market participants..

stock brokers (who are members of the stock exchanges)

the mutual funds / asset management companies (AMCs)

financial institutions

foreign institutional investors (FIIs)

investment companies

individual investors

depository participants and

banks

Apart from them, there are some *capital market intermediaries*

Registrars and Transfer Agents

Custodians and

Depositories

Commodity market

facilitates transactions between buyers and sellers of commodities.

Commodity transactions can be done in ..

the *cash market* for immediate payment and

  • delivery*, or in the forward and
  • futures market* for settlement at a future point in time.

An exchange traded futures contract standardizes the quality, quantity and terms of settlement of the underlying and reduces counter-party risk in the trade.

Investors in the commodity markets include producers and consumers who want to hedge their exposure, investors who want to take advantage of arbitrage opportunities and speculators who want to benefit from an expected price movement.

3 national commodity exchanges for trading in commodity futures:

Multi Commodity Exchange of India Limited

the National Commodity and Derivative Exchange Limited and

the National Multi Commodity Exchange of India Limited

The *Forward Markets Commission (FMC)* is the regulator of commodity futures and forward transactions in India.

FMC operations are now mereged with SEBI if i am not wrong.

You will notice that the recent SEBI circulars have changed a bit.

The circulars will read something like this: *Applicable to all market segments except Commodities*

This means that SEBI is acting as a regulator for the Commodities segment as well.

Foreign Exchange Market=

The *4. Foreign Exchange Market* determines the value of one currency relative to another (called ‘currency pairs’) to enable settling trades in goods and services.

Example: INREUR pair that correlates between INR and EUR

There is a *spot market* and *forward market* in currency.

The *forward market* currency deals have to be supported by an exposure to currency from trade that requires hedging.

Future trades in currency are done on the exchanges.

The RBI publishes a reference rate for each currency pair based on the bid and offer rates of a set of banks.

The reference rate is available for every week day.

We can check this data on RBI website.

The *settlement of spot market* trades happens with actual delivery and receipt of currency on gross settlement basis on the value date.

The *value date* is the second business day after trade date i.e. T+2 day.

The *forward market in currency* can be the *OTC market or the exchange traded futures market*.

Now let us go to the next branch.

  • 5. Insurance*
  • Insurance products* may provide pure risk cover (term insurance) or may combine insurance and investment on a traditional platform (endowment, whole life) or unitlinked platform.

There is one public sector insurance provider, namely the Life Insurance Company

and 24 private insurers.

Broadly categorized insurance products are:

1. Traditional products,

2. variable insurance products and the

3. unit linked products

  • Traditional* life insurance products include ..

term insurance,

endowment policies,

whole life policies and the like.

  • Variable* insurance products and unit linked products combine risk protection and investment.

The *non-life insurance or general insurance segment* covers

motor,

health insurance,

travel,

fire and personal accident, among others.

There are 28 insurers in this segment.

  • Insurance Regulatory and Development Authority, India (IRDA)*

regulates the insurance sector including

registering insurance companies,

clearing insurance products,

licensing and establishing norms for the intermediaries and

protecting policy holders’ interest

There are so many types of people involved in the insurance business.

  • Individual agents* are certified and licensed by IRDA and can sell policies of life insurance and general insurance companies or both.
  • Corporate agents* include institutions such as banks, and they offer the insurance products to their clients.
  • Agents* typically represent one life insurer, one general insurer and one standalone health insurance company.
  • Surveyors and loss assessors* are used by general insurance companies to assess a claim and quantum of loss.
  • Third party administrators* are used to process health insurance claims.

Next is *6. Pension Market*

PFRDA regulates the pension market in India.

PFRDA = Pension Fund Regulatory and Development Authority

NPS is a defined contribution pension schemes that covers government employees who joined service after a specified dates.

It is also available for other citizens.

The government’s pension plan has moved from *defined benefit structure*

to *defined contribution structure*

  • defined benefit structure* = all retired employees of a particular rank get the same pension with no contributions by the employee
  • defined contribution structure* = the employee and the employer contribute to the pension fund and the pension received on retirement will depend upon the fund accumulated.
  • Role of Participants in the Financial Markets*
  • Stock exchanges* provide a regulated platform for trading in securities at current values so that investors have liquidity in the securities held by them.
  • Depository participants* are empanelled members of a depository who enable investors to hold and trade in securities in dematerialized form.
  • Custodians* hold and manage the operational aspects of trading in securities on behalf of institutional investors.
  • Stock brokers* are registered members of a stock exchange who enable investors to put through transactions on a stock exchange for a brokerage.
  • Investment banks* help issuers make decisions on capital structure and assist in fund raising activities.
  • Commercial banks* provide banking services of taking deposits, providing credit and enable payment services.
  • Insurance companies* provide service of insuring life, property and income against unexpected and large loss or expense.
  • Pension Funds* are intermediaries who are authorized to take contributions from eligible individuals and invest these funds to create a retirement corpus.
  • Asset management companies and portfolio managers* are investment specialists who offer their services in selecting and managing a portfolio of securities.
  • Investment advisers and distributors* work with investors to help them make a choice of securities that they can buy, based on an assessment of their needs, time horizon, return expectation and ability to bear risk.

The *Ministry of Finance* through its departments regulates and overseas the activities of the banking system, insurance and pension sectors, the capital markets and its participants.

The *Registrar of Companies (RoC)* is the authority appointed under the Companies Act to register companies and to ensure that they comply with the provisions of the law.

The *Reserve Bank of India* regulates the money market segment of securities market and acts as the manager of the government’s borrowing program.

RBI is also the regulator of the Indian banking system and conducts the monetary, forex and credit policies.

The *Securities and Exchange Board of India (SEBI)* is the chief regulator of securities markets in India. It facilitates the growth and development of the capital markets and ensures that the interests of investors are protected.

  • IRDA* is the licensing authority for insurance companies. It ensures the adherence of insurance products to the rules laid down and regulates the distribution of insurance products.

The *PFRDA* has been assigned the responsibility of designing the structure of funds and constituents in the National Pension System (NPS).

The *Forward Markets Commission* is the regulatory body that oversees the futures and forward trading in commodities in India.

Questions

1. What is the address of the official website of RBI

2. Which type of insurance product is an Money back policy?

3.what is the full form of FMC?

4. A Bank is a _ agent of insurance products

5. Who is the professional (employee of insurance company) who actually determines the insurance premium?

6.Give one example of pair currency?

7.who protects policy holder's interest?

8.Goverment pension plan has moved from DBS to---------?

9 Brokers has right to charge for Depository participants?

10.Name the rate at which Rbi gives loan to others bank?

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