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Financial Markets

The financial system is a structured network that facilitates fund flow in an economy, comprising financial institutions, markets, instruments, services, and regulators. It plays a vital role in economic development by mobilizing savings, allocating resources efficiently, and fostering innovation. The Indian financial system has evolved through significant reforms, facing challenges like financial inclusion and non-performing assets while striving for modernization and inclusivity.

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8 views3 pages

Financial Markets

The financial system is a structured network that facilitates fund flow in an economy, comprising financial institutions, markets, instruments, services, and regulators. It plays a vital role in economic development by mobilizing savings, allocating resources efficiently, and fostering innovation. The Indian financial system has evolved through significant reforms, facing challenges like financial inclusion and non-performing assets while striving for modernization and inclusivity.

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rahulsingh29aug
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© © All Rights Reserved
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Financial Markets & institutions (FMI)

UNIT – 1

Introduction to Financial System


The financial system refers to a structured network of institutions, markets, instruments, and services that
facilitate the flow of funds within an economy. It plays a crucial role in mobilizing savings, allocating
resources efficiently, and supporting economic development.

Components of Financial System


1. Financial Institutions:
o Includes banks, non-banking financial companies (NBFCs), insurance companies, mutual
funds, etc.
o They act as intermediaries to channel savings into investments.
2. Financial Markets:
o Platforms for trading financial assets like stocks, bonds, and derivatives.
o Divided into money markets (short-term instruments) and capital markets (long-term
instruments).
3. Financial Instruments:
o Includes equities, bonds, derivatives, and other securities.
o Represents claims on future income or assets.
4. Financial Services:
o Services provided by financial institutions, such as fund management, credit rating,
insurance, and investment advisory.
5. Financial Regulators:
o Institutions like the Reserve Bank of India (RBI), Securities and Exchange Board of India
(SEBI), and Insurance Regulatory and Development Authority (IRDA) oversee the system.

Financial System and Economic Development


The financial system plays a crucial role in fostering economic development by:
1. Mobilizing Savings: It channels household and corporate savings into productive investments.
2. Efficient Resource Allocation: Financial markets ensure funds are allocated to the most efficient
and high-yielding projects.
3. Facilitating Capital Formation: By pooling resources, the financial system helps in building
infrastructure, expanding industries, and fostering entrepreneurship.
4. Risk Management: Instruments like insurance and derivatives help mitigate risks, encouraging
investment.
5. Employment Generation: A robust financial sector supports job creation in banking, insurance,
investment, and allied industries.
6. Promoting Innovation: By funding research and development, the financial system fosters
technological advancements and new business ventures.

Financial Intermediaries
Financial intermediaries bridge the gap between savers and borrowers. They play a pivotal role in the
financial system by:
1. Banks: Accept deposits and provide loans, facilitating liquidity and credit flow.
2. Non-Banking Financial Companies (NBFCs): Provide credit and other financial services but
operate outside traditional banking regulations.
3. Mutual Funds: Pool investments from individuals to invest in diversified portfolios of stocks,
bonds, and other securities.
4. Insurance Companies: Provide risk coverage and act as a source of long-term capital for
industries.
5. Pension Funds: Mobilize savings for post-retirement needs, channelling them into long-term
investments.
By reducing transaction costs and providing a platform for risk-sharing, financial intermediaries ensure
stability and efficiency in the financial system.

Indian Financial System


The Indian financial system is a blend of modern and traditional institutions, markets, and instruments. Its
evolution can be traced through key milestones like the establishment of the RBI in 1935, the
nationalization of banks in 1969, and the liberalization reforms of the 1990s.
1. Key Institutions: The system includes the RBI, commercial and cooperative banks, development
banks like NABARD, and regulatory bodies like SEBI and IRDA.
2. Financial Markets: India has vibrant equity markets led by stock exchanges like BSE and NSE,
along with money and bond markets that cater to short- and long-term financing needs.
3. Instruments: The Indian financial system encompasses traditional instruments like fixed deposits
and bonds, as well as modern tools like mutual funds and derivatives.
4. Technology Adoption: With digital banking, mobile payments, and fintech startups, India has
witnessed a revolution in financial services delivery.
5. Challenges: Issues like financial inclusion, non-performing assets (NPAs), and regulatory hurdles
remain key challenges.

Financial Sector Reforms


India's financial sector has undergone significant reforms, especially since the 1991 liberalization. Key
reforms include:
1. Banking Sector Reforms:
o Deregulation of interest rates.
o Introduction of private and foreign banks.
o Strengthening of capital adequacy norms.
2. Capital Market Reforms:
o Establishment of SEBI to regulate and develop markets.
o Dematerialization of shares and introduction of online trading.
3. Insurance Sector Reforms:
o Opening the sector to private players.
o Introduction of IRDA to oversee insurance operations.
4. Monetary Policy Reforms:
o Shift towards inflation-targeting mechanisms.
o Enhanced transparency in policy formulation.
5. Financial Inclusion Initiatives:
o Pradhan Mantri Jan Dhan Yojana (PMJDY) for universal banking access.
o Promotion of digital payments and fintech innovations.
These reforms have contributed to a more competitive, transparent, and inclusive financial system,
aligning India with global standards.
The financial system is a cornerstone of economic development, providing the framework for resource
allocation, investment, and innovation. While India’s financial system has made significant strides in
modernization and inclusivity, continued reforms and technological adoption are essential to address
challenges and ensure sustained economic growth.

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