The way it should be

"It should not escape notice that gold and silver after circulating in every other quarter of the globe, come at length to be absorbed in Hinduston"

                         ~Francois  Bernier

Indian financial system

Posted by VASUDEVA REDDY on Sunday, January 9, 2011

Indian financial system:

What exactly the Indian financial system. It is a very vast concept, it includes the many things which will take years to complete. I want to give brief introduction about indian financial system, up to my knowledge. Indian financial system basically includes the financial markets, financial instruments and financial intermediation.  And those are further classified. Let us see the flavor of financial system……..

Financial markets:

As you know market is a place of exchange. But the difference between financial market and ordinary market is, in ordinary market we use to exchange the real goods while in financial markets there is no exchange of real goods involved. It is just a creation or transfer of financial assets. And the markets can be,

 Money market:

It is a monetary system that involves the lending and borrowing the short-term funds. This sector is dominated by the banks, government institutions. It deals with the liquidity of money in market. As a central bank, Reserve Bank of India (RBI) regulates the money market structure. The rise in inflation, repo rate, and reverse repo rate all comes under this market only. The treasury bills, repurchase agreements, commercial papers, certificate of deposit, bankers acceptance are all comes under this.

Capital market:

The basic need of capital market is for long-term investments. It is where stock markets come into picture. Companies, corporations, government institutions rises the fund through the capital market by selling the part of their ownership. Financial regulators, like security and exchanges board of india (SEBI), are designed to ensure the public to invest.  It can be classified as primary markets and secondary markets. In primary market, the company (corporate) rises the fund through the Initial Public Offering (IPO) or from the banks by the process  of underwriting. Pls don’t mind I cann’t explain what is underwriting right because even I too don’t know much about that, once I come to know I’ll let you know. In secondary market, the existing securities or assets sold up to raise the fund.

Ex; recently Manganese Ore India Limited (MOIL) came to IPO that is called raise in funds through primary market because it was not there before in the market. I applied for that but I did not get even a single shareL. And Power grid came up with Follow up Public Offering (FPO), means it was there in the market even before but wants to raise more funds so it did it with secondary markets. Here I got the sharesJ.

Forex market:

It is one of widest concept to learn. Forex market means the Foreign exchange market.  it deals with the multi-currency requirements, which are met the exchange of currencies. I’ll explain the very basic thing in forex market with a simple example,

            Suppose you have money of Rs.1,00,00 and you wants to earn money with the forex market. Assume the current exchange prices as

1 $= Rs.50

1€= 0.78 $ and

1€=Rs70

With the above values, you can get $2000 from Rs.1,00,000. From $2000 you can get €1560. As the exchange rate of euro is rs.70 you can get 1560*70=109200. Means you can earn Rs.9200 within a second only by exchanging the currencies.

Credit market:

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.

Financial Intermediaries-

Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, financial intermediaries came into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self-regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in move than one market e.g. underwriter. However, the services offered by them vary from one market to another.

Financial tools-

Money Market Tools-

The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.

 

Some of the important money market instruments are briefly discussed below;

 

1. Call/Notice Money

2. Treasury Bills

3. Term Money

4. Certificate of Deposit

5. Commercial Papers 



Ref: wikipedia.org, articlebase.com, investopedia.org and "indian money market" by jayanth varma etc


 


Tags: financial system forex money primary secondary capital intermediaries financial tools 

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