Indian Financial System

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Overview of Indian Capital Markets

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.

  • The financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sectors (borrowers).
  • It consists of investors or buyer of securities, borrowers or sellers of securities, intermediaries and regulatory bodies.
  • Financial Market does not refer to the physical location. Formal trading rules, relationships and communication networks for originating and trading financial securities link the participants of the market.

Indian Financial System

  • The phenomenon of imbalance in the distribution of capital or funds exist in every economic system.  There are areas or people with surplus funds and there are those with the deficit.
  • A financial system functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit.
  • A financial system is a composition of various institutions, market, regulations, laws, practices, money managers, analysts, transactions and claims and liabilities.

The functions performed by Financial Systems:

The functions performed by Financial Systems:

  • The Saving function
  • Liquidity Function
  • Payment Function
  • Risk Function
  • Policy Function

Financial Markets

The Financial Market is a broad term describing any marketplace where trading of securities including equities, bonds, currencies
and derivatives occur.

  • Financial markets can be defined as the market in which financial assets are created or transferred.
  • Financial assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payments in the form of interest or dividend.
  • Financial Markets are sometimes classified as Primary and Secondary Markets. But more often they are classified as Money Markets and Capital markets. 
  • The term financial market is often used to refer just to markets that are used to raise finance; for long term capital markets and for short term finance, the money markets.

Functions of Financial Markets

  • Borrowing and lending
  • Price discovery
  • Information collection and distribution
  • Risk sharing
  • Liquidity
  • Efficiency

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