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 1800’s. 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in technology has enabled markets to graduate from outdated systems to modern business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.

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.

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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

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.

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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
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

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 MEANING OF MONEY MARKET:-
A money market is a market for borrowing and lending of short-term funds. It deals
in funds and financial instruments having a maturity period of one day to one year. It is a
mechanism through which short-term 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 :-

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.

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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 basis. The participants are mostly
banks. Therefore it is also called Inter-Bank 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.

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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. 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

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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. 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.

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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.

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

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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.

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

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 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.

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.

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 RBI’s
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.

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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.
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.

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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.

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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.

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.

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India’s 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

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 proper screening mechanism is
missing to take care of the quality and transparency issues of private placement deals.

Dominance of financial institutions:

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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%.

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 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

 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

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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 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

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non-banks to manage their short-term liquidity mismatches and facilitated the
transformation of the call money market into a pure inter-bank 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 Bank’s 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 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 bid-ask spread in the overnight
rates indicates that the Indian money market has become reasonably deep, vibrant and
liquid. During April 2004−February 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

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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 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 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.

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Since May 2011, the liquidity conditions can be broadly divided into three distinct
phases. After generally remaining within the Reserve Bank’s comfort zone during the
first phase during May–October 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 Bank’s 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 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

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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-à-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 2007–08, both the CP and CD volumes have also increased very
significantly. Furthermore, issuance of 91-treasury bills has also 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.

10. Repo in corporate bonds allowed in March 2010.

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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 Government’s
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.

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.

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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 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

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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.

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.

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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 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

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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.

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 government’s 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

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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, cross-
border 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 and more market determined. Foreign Exchange
Dealer’s 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.

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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$ 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 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.

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1947 to1977: During 1947 to 1971, India exchange rate system followed the par value
system. RBI fixed rupee’s 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 Pound-Sterling.
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 India’s 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 India’s perennial trade deficit widened during this period.
By the beginning of 1991, Indian foreign exchange reserve had dwindled down to such a
level that it could barely be sufficient for three-week’s 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 India’s 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 market-oriented environment. Many policy changes were brought in
covering different aspects of import-export, FDI, Foreign Portfolio Investment etc. One
important policy changes pertinent to India’s forex exchange system was brought in --

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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.

Commodity Market

Commodity futures markets largely remain underdeveloped in India. This is in spite of the
country‘s 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 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

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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 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 India‘s liberalization epoch as per the
June 1980 Khusro committee‘s 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

32 | P a g e
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

STRUCTURE, CONDUCT & CURRENT STATUS

Broadly, the commodities market exists in two distinct forms—the over-the-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
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

33 | P a g e
conditions. An efficient and well-organised commodities futures market is generally
acknowledged to be helpful in price discovery for traded commodities.
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 Iron, Steel Long

METAL
(Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc
BULLION Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M
Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton
FIBER
Yarn, Kapas
Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.
ENERGY
Sour Crude Oil
SPICES Cardamom, Jeera, Pepper, Red Chilli, Turmeric
PLANTATIONS Arecanut, Cashew Kernel, Coffee (Robusta), Rubber
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, Mustard Seed (Jaipur), Mustard Seed (Sirsa),
OIL & OIL SEEDS
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 Oil, Potato (Agra),
OTHERS
Potato (Tarkeshwar), Sugar M-30, Sugar S-30

BENEFITS OF COMMODITY FUTURES MARKETS

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 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.

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.

5. 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

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 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 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

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 of quality standard: the quality certificates that are issued by the exchange-certified
warehouses have the potential to become the norm for physical trade.

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Derivatives Market

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

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.

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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 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.

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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
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
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

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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, 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

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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

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.
 1972 -Informal carry forward trades between two settlement cycles began on
BSE.

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  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
 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

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  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
 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

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  30th March 2012-BSE launched trading in BRICSMART indices derivatives

Insurance Market

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,

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Liverpool and London Globe 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 sea-faring 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
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.

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 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, unit-
linked 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.
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

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 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 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.
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

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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.

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 Board of India, and new infrastructure

49 | P a g e
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, India’s 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.

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

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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.

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Primary Data

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

Q. What were the markets like in the 1980’s as compared to the current day?

A. In the 1980’s 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 FDI’s and FFI’s 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.

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?

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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.

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 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 wasn’t 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

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!

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