Financial markets

What do you understand by financial systems. Explain the structure and components of
financial system
Financial system refers to the complex framework of institutions, markets, laws, regulations,
and practices that facilitate the flow of funds between savers and borrowers. It includes a
wide range of financial intermediaries, instruments, and services that help in the allocation
of resources and the creation of wealth in an economy. The financial system plays a crucial
role in promoting economic growth, stability, and prosperity by mobilizing savings,
channelling them into productive investments, and managing risks.
Structure of Financial System: The financial system can be divided into two main
components:
1. Financial Markets: Financial markets are the forums or platforms where the demand
for funds meets the supply of funds. The financial markets can be classified into three
categories based on the nature of the securities traded, i.e., money market, capital
market, and derivatives market.
 Money Market: Money market is a market for short-term debt securities that have a
maturity of less than one year. The money market deals with instruments like
Treasury bills, commercial papers, certificates of deposits, and call money. Money
market securities are highly liquid and have low credit risk, making them suitable for
investors who seek safety and liquidity.
 Capital Market: Capital market is a market for long-term securities that have a
maturity of more than one year. The capital market deals with instruments like
equities, bonds, debentures, and preference shares. Capital market securities are less
liquid and have higher credit risk than money market securities, making them
suitable for investors who seek higher returns and are willing to take risks.
 Derivatives Market: Derivatives market is a market for financial instruments whose
value is derived from the value of an underlying asset, such as stocks, bonds,
currencies, or commodities. The derivatives market deals with instruments like
futures, options, swaps, and forwards. Derivatives are used for hedging, speculation,
and arbitrage purposes.
2. Financial Intermediaries: Financial intermediaries are the institutions that bridge the
gap between the savers and borrowers by accepting deposits from savers and
lending them to borrowers. The financial intermediaries can be classified into three
categories based on their nature and functions, i.e., depository institutions,
contractual savings institutions, and investment intermediaries.
 Depository Institutions: Depository institutions are the institutions that accept
deposits from savers and provide credit to borrowers. The depository institutions
include commercial banks, savings banks, and credit unions. The depository
 institutions are regulated by the central bank and provide a range of services like
checking accounts, savings accounts, loans, and mortgages.
 Contractual Savings Institutions: Contractual savings institutions are the institutions
that collect savings from individuals and invest them in long-term assets like stocks,
bonds, and real estate. The contractual savings institutions include insurance
companies, pension funds, and mutual funds. The contractual savings institutions are
regulated by the insurance regulator and the securities regulator.
 Investment Intermediaries: Investment intermediaries are the institutions that
provide investment services like securities brokerage, investment advisory, and asset
management. The investment intermediaries include stockbrokers, investment
bankers, and asset management companies. The investment intermediaries are
regulated by the securities regulator and provide a range of services like trading,
underwriting, and portfolio management.

The components of the financial system include:

1. Financial Institutions: Financial institutions are intermediaries that connect savers
and borrowers. They are of two types: banking and non-banking institutions. Banking
institutions, including commercial banks, savings and loan associations, and credit
unions, accept deposits from savers and provide loans to borrowers. Non-banking
institutions, including insurance companies, mutual funds, pension funds, and
investment banks, provide different financial products and services to their
customers.
2. Financial Markets: Financial markets are platforms that enable the buying and selling
of financial assets, such as stocks, bonds, currencies, and commodities. The main
types of financial markets are the stock market, bond market, money market, and
foreign exchange market. The prices of assets traded in these markets are
determined by supply and demand factors.
3. Financial Instruments: Financial instruments are securities, contracts, or other types
of financial assets that can be traded on financial markets. Examples of financial
instruments include stocks, bonds, derivatives, and foreign exchange contracts.
4. Payment and Settlement Systems: Payment and settlement systems are critical
components of the financial system that facilitate the transfer of funds between
parties in a transaction. These systems include electronic funds transfer (EFT),
Automated Clearing Houses (ACH), wire transfer, and payment cards.
5. Financial Regulations: Financial regulations refer to the legal and regulatory
frameworks that govern the financial system. Regulations aim to maintain financial
stability, promote market integrity, and protect the interests of investors and
consumers. These regulations are created and enforced by government agencies
 such as the Securities and Exchange Commission (SEC) and the Federal Reserve
System.
6. Financial Infrastructure: Financial infrastructure refers to the physical and
technological systems that support the operation of the financial system. This
includes the communication and information technology systems, payment systems,
and other hardware and software systems that enable financial transactions.
7. Financial Services: Financial services refer to the products and services offered by
financial institutions to their clients. These services include banking services such as
loans, deposits, and credit cards, investment services such as asset management,
mutual funds, and securities trading, and insurance services such as life, health, and
property insurance.

Relationship between a stable financial system and economic development

A stable financial system is essential for the sustainable economic growth of a country. A
financial system is responsible for channeling funds from savers to investors and
facilitates economic transactions, providing a conducive environment for trade,
production, and consumption activities. It enables individuals and businesses to access
the required capital to invest in new projects, research and development, and expand
their businesses, thus driving economic growth. In this article, we will discuss the
relationship between a stable financial system and economic development in more
detail.
A stable financial system is necessary for the efficient allocation of resources in an
economy. When a financial system is stable, it promotes the efficient mobilization of
savings and the allocation of resources to the most productive investment opportunities.
This, in turn, boosts economic growth by stimulating investments, creating employment
opportunities, increasing productivity, and enhancing the standard of living. A stable
financial system provides a platform for businesses to access affordable and adequate
capital, enabling them to invest in technology and innovation, which are critical drivers
of economic growth.
Moreover, a stable financial system fosters investor confidence and encourages capital
inflows, which are essential for long-term economic development. When investors have
faith in the financial system, they are more likely to invest their capital in productive
ventures, resulting in increased economic growth. Investors are also more likely to invest
for longer durations when they are confident in the financial system's stability, which can
translate into higher returns and more productive investments.
Furthermore, a stable financial system helps to mitigate financial crises and shocks,
ensuring that the economy remains resilient in the face of external shocks. A robust
financial system is characterized by strong regulatory oversight and a robust legal
framework, which helps to mitigate systemic risks and prevent the buildup of financial
 imbalances. This, in turn, promotes financial stability, which is essential for sustainable
economic growth.
In contrast, a weak or unstable financial system can hinder economic growth by creating
barriers to the efficient allocation of resources. A weak financial system is characterized
by inadequate regulation, lack of transparency, weak legal framework, and insufficient
institutional capacity. This can lead to a high cost of capital, limited access to financing,
and weak investor confidence. Consequently, businesses may be unable to invest in new
projects or expand their operations, leading to reduced economic activity and slow
economic growth.

Give a brief description of financial markets in india. Explain the role of financial
intermediaries
Financial markets in India refer to the platforms where financial instruments such as shares,
bonds, currencies, and commodities are traded. These markets enable investors to buy and
sell financial assets and help channelize savings into productive investments.
India's financial markets have evolved significantly over the years, and today, the country has
a well-developed financial market infrastructure. The Indian financial markets consist of two
major categories, namely the money market and the capital market.
Money Market: The money market in India deals with short-term financial instruments, such
as treasury bills, commercial papers, and certificates of deposit. These instruments have a
maturity period of up to one year and are usually issued by governments, banks, and other
financial institutions.
Capital Market: The capital market in India deals with long-term financial instruments such
as equity shares and debentures. The capital market is further divided into the primary
market and the secondary market. The primary market deals with the issuance of new
securities, while the secondary market deals with the trading of existing securities.
The major players in the Indian financial markets include stock exchanges, depositories,
brokers, investment banks, mutual funds, insurance companies, and other financial
institutions.
Stock Exchanges: There are two major stock exchanges in India, namely the Bombay Stock
Exchange (BSE) and the National Stock Exchange (NSE). These exchanges provide a platform
for the trading of equities and other financial instruments.
Depositories: Depositories in India include the National Securities Depository Limited (NSDL)
and the Central Depository Services Limited (CDSL). Depositories provide electronic storage
and transfer of securities, eliminating the need for physical certificates.
Brokers: Brokers are intermediaries between buyers and sellers in the financial markets.
They facilitate transactions and earn a commission on the trade.
Investment Banks: Investment banks in India provide a range of financial services, including
underwriting of securities, merger and acquisition advisory services, and corporate finance.

Mutual Funds: Mutual funds pool funds from several investors and invest them in a variety
of financial instruments. They provide investors with a diversified portfolio and professional
management of their investments.
Financial intermediaries play several roles in the financial markets, including:
1. Mobilization of Savings: Financial intermediaries play a critical role in mobilizing
savings from households and channelizing them into productive investments.
2. Risk Diversification: Financial intermediaries enable investors to diversify their
investment portfolios and reduce risks by pooling funds from several investors and
investing them in a variety of financial instruments.
3. Provision of Liquidity: Financial intermediaries provide liquidity to investors by
offering them an easy exit route from their investments.
4. Credit Intermediation: Financial intermediaries provide credit to borrowers by
mobilizing deposits from savers and lending them to businesses and individuals.
5. Price Discovery: Financial intermediaries provide a platform for price discovery of
financial assets by facilitating transactions between buyers and sellers.

Explain the impact of efficient financial system in economic development of a country with
examples from indian financial systems
An efficient financial system is crucial for the economic development of a country. It
provides a range of financial services that facilitate the movement of capital from savers to
investors. The financial system plays a significant role in the growth of the economy by
mobilizing savings, allocating resources efficiently, and providing a range of financial services
to individuals and businesses. In this context, the impact of an efficient financial system on
the economic development of a country can be explained with the help of examples from
the Indian financial system.
Mobilization of Savings: An efficient financial system enables the mobilization of savings
from households, which are then allocated to various sectors of the economy. The
mobilization of savings is essential for economic development as it provides the necessary
funds for investment. In India, the financial system has played a significant role in mobilizing
savings by providing a range of savings and investment products to individuals. The
government has also launched various schemes such as the Sukanya Samriddhi Yojana and
the National Pension Scheme to encourage households to save and invest.
Allocation of Resources: An efficient financial system plays a crucial role in the allocation of
resources by directing funds to the most productive uses. In India, the financial system has
facilitated the allocation of resources to various sectors such as agriculture, manufacturing,
and services. The Reserve Bank of India (RBI) has played a significant role in this regard by
formulating policies that promote the allocation of credit to priority sectors.
Provision of Financial Services: An efficient financial system provides a range of financial
services to individuals and businesses, which in turn promotes economic development. In
India, the financial system has evolved to provide a range of services such as savings
accounts, loans, insurance, and investment products. The rapid expansion of the banking
sector has led to greater financial inclusion, which has been instrumental in promoting
economic development.
Facilitation of Trade and Commerce: An efficient financial system facilitates trade and
commerce by providing a range of financial instruments such as letters of credit, bills of
exchange, and other trade finance products. In India, the financial system has played a
crucial role in facilitating international trade by providing various trade finance products. The
Export-Import Bank of India provides financial assistance to Indian exporters and importers,
which has been instrumental in promoting international trade.
Promotion of Innovation and Entrepreneurship: An efficient financial system promotes
innovation and entrepreneurship by providing access to finance for new and innovative
businesses. In India, the financial system has played a significant role in promoting
entrepreneurship by providing a range of financial products such as venture capital, angel
funding, and crowdfunding. The Small Industries Development Bank of India (SIDBI) has
been instrumental in promoting entrepreneurship by providing financial assistance to small
and medium-sized enterprises.

Explain recent reforms in indian financial system

In recent years, the Indian financial system has undergone several significant reforms aimed
at promoting financial stability, deepening financial markets, and increasing access to
finance. Some of the key reforms are:
1. Bankruptcy and Insolvency Code (2016): The Bankruptcy and Insolvency Code (BIC)
was introduced in 2016 to provide a time-bound process for resolving insolvencies
and bankruptcy cases. The code aimed to simplify the insolvency process and provide
a framework for the timely resolution of distressed assets. This has improved the
business environment in India and provided more confidence to lenders and
investors.
2. Goods and Services Tax (GST) (2017): The GST is a comprehensive indirect tax that
was implemented in India in 2017. The tax replaced multiple indirect taxes that were
levied by the central and state governments. The GST has helped in reducing the tax
burden on businesses, improving tax compliance, and creating a more efficient tax
system. This has helped in boosting economic growth and improving the ease of
doing business in India.
3. Financial Inclusion: The government of India has launched several initiatives to
promote financial inclusion in the country. The Pradhan Mantri Jan Dhan Yojana
(PMJDY) was launched in 2014 to provide financial services to the unbanked
population in the country. Other initiatives such as the Aadhaar-enabled Payment
System (AEPS) and the Unified Payments Interface (UPI) have also helped in
improving financial inclusion in the country.
4. Digital Payments: The government has also taken several steps to promote digital
payments in the country. Initiatives such as the Bharat Interface for Money (BHIM)
and UPI have helped in promoting digital payments and reducing the use of cash in
the economy. This has helped in improving the transparency of financial transactions,
reducing transaction costs, and promoting financial inclusion.
5. Infrastructure Development: The Indian government has also focused on developing
infrastructure in the country, which has helped in promoting economic growth. The
development of the National Investment and Infrastructure Fund (NIIF) has helped in
mobilizing funds for infrastructure projects. The government has also launched
initiatives such as the Smart Cities Mission, which aims to develop 100 smart cities in
the country.