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Macroeconomic Developments and Securities Markets

IS M R

1. Macroeconomic Developments and Securities Markets
Section-I: Macroeconomic Developments
Global Economic Environment
Following the slowdown witnessed in 2011, the global growth outlook has deteriorated further in 2012. According to the latest available IMF forecast (released in October 2012), the global output growth is expected to decline from 3.8 percent in 2011 to 3.3 percent in 2012 (Chart 1-1), mainly reflecting a sharp downward revision in growth projections in some of the euro area advanced economies (such as, Germany, France, Italy and Spain) and BRIC 1 economies. Furthermore, the outlook for income growth in 2012 for almost all countries across the globe has deteriorated in successive forecasts. For 2012, while the growth projection fell from 1.9 percent in the September 2011 forecast to 1.3 percent in the October 2012 forecast, the projection for emerging economies fell from 6.1 percent to 5.3 percent between these two forecasts. The only bright spot is that between these two forecasts for output growth in 2012, the projection for the US economy has improved from 1.8 percent to 2.2 percent. Chart 1-1: Global Growth Projections for 2012 by IMF

Source: WEO database, IMF

The reasons for the pessimism in growth outlook mainly relate to the continued sovereign debt overhang and the financial market uncertainties in the euro area. Euro area risks have affected business confidence and have also caused world trade to decelerate. Consequently, several emerging and developing economies (EDEs) face weaker external demand on top of an already slowing domestic demand. Further downside risks to global growth may stem from a possible ‘fiscal cliff’2 leading to sudden and sharp fiscal consolidation in the US, notwithstanding the ‘open-ended’ quantitative easing (QE)3 announced by the Federal
An acronym for a group of four countries (Brazil, Russia, India and China) which are deemed to be at a comparable stage of economic development. 2 The fiscal cliff refers to a possible large reduction in the federal budget deficit in 2013 on account of expiry of both tax and expenditure cuts, becoming effective from January 2013. 3 QE is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy becomes ineffective. The Federal Reserve announced the QE 3 in September 2012 to buy US$ 40 billion worth of bonds every month.
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These measures appear to be aimed at staving off the crisis rather than addressing its structural issues. Beginning with the peripheral euro area in 2009.5 percent in Q2 of 2012. Russia’s growth weakened further to 4. near-term improvement in growth prospects for EDEs. have not proved to be effective in debt crisis resolution. The developments in the euro area deserve some explanation. (iii) measures to recapitalize and strengthen prudential norms in the European banking system and (iv) structural measures to correct a distorted fiscal system.3 percent in the corresponding period of the previous fiscal. How has the slowdown affected the global capital flows? After having surged to unprecedented levels in 2007 and first half of 2008. Brazil’s growth fell for the tenth successive quarter to 0.6 per cent in 2010 and 5. (Table 1-1) Further. The euro area is basically finding it difficult to get out of the troubled situation.1 percent in Q2 of 2012. The growth rate of the Indian economy was 5. World Trade Volume (goods & services) is projected to grow by 3. (ii) exceptional liquidity facility provided by ECB.7 per cent (projected) in 2012 from 4.0 per cent for 2012 as compared to 6.4 percent in the first-half of the year 2012-13 as compared to 7. continued to slow.5 per cent in 2011. decelerating continuously for three successive quarters. Private capital flows cover direct investment. such as France and Austria.2 percent in 2012 as compared to 12.3 billion in 2012. Concerns over fiscal sustainability and solvency of these economies still remain. the sovereign debt crisis has of late spread to engulf core euro area economies. 2012. the largest economy of the world may have adverse impact on the global growth prospects.com . including India. however.8 per cent in 2011. (Table 1-1) 4 5 Reserve Bank of India Annual Report.I S MR Macroeconomic Developments and Securities Markets 6 Reserve. it is projected to slump further to US$ 268. the projected growth for emerging and developing economies is 4. Partially reflecting a slowdown in the imports of advanced economies to 1. which were downgraded in January 2012 from their AAA rating status. Spain’s economic condition worsened necessitating bail-out packages for its banks. For example. The economic activities in Emerging and Developing Economies (EDEs) have been affected by the slowdown in advanced economies as well as some domestic constraints. portfolio investment and other investment. www. for example. With continuing risks to global growth and trade. The US Congressional Budget Office (CBO) forecasts that the US fiscal deficit will decline by 3. enormous public debt and banking problems. in June 2012.6 percent (y-o-y) in Q3 of 2012.nseindia.3 percentage points to 4 percent of GDP in 2013 due to the looming fiscal cliff. The BRIC economies. seems unlikely. China’s growth has decelerated for the seventh consecutive quarter to 7. the net private capital flows 5 to emerging markets and developing countries slowed down from US$ 604.4 per cent in 2011. The policy measures taken to alleviate the euro zone crisis have been mainly fourfold: (i) regional financial arrangements and euro-IMF joint provision of resources. The sovereign debt crisis has also raised the probability of Greece exiting from the euro and has resulted in a spillover to a banking crisis in Spain and Portugal.7 billion in 2010 to US$ 503 billion in 2011. As per IMF's World Economic Outlook (WEO) update of October 2012. being caught in a deep structural and multifaceted crisis characterized by large fiscal deficit. the individual affected economies do not have the liberty of using exchange rate and monetary policy as stabilization measures. There are fears that such a sharp fiscal consolidation in the US. The main problem is that as countries in a currency union.4 These policy measures. faltering growth in the developed economies hit exports from emerging and developing economies.

2 -89. subdued business confidence and persistent global economic uncertainty. www.6 -51.8 399. when the growth rate declined from a level of 8. While the slowdown in agriculture sector growth was on account of the strong base effect. Due to weakening foreign equity inflows and widening trade deficits. Indian rupee.2 4.com .5 2.5 percent in the last three quarters (from Q4 of 2011-12 to Q2 of 2012-13).3-5. which continues to function as the world's key reserve currency. Source: Ministry of Finance.2 393. @ .5 2010 2011 2012 P 2013 P 604.7 392. investment and external (net exports). 2012. The slowdown continued in subsequent quarters and growth has been in the range of 5.6 The slowdown was also reflected in all the three sectors of the economy but industrial sector suffered the sharpest deceleration (Chart 1-2). Macroeconomic Developments in India While greater integration with the world economy and global financial markets have benefited India in several ways over the years.6 5. hotels.0 3.8 503.6 5.0 percent in the first quarter to 6.9 -160. of India Against this backdrop.7 Macroeconomic Developments and Securities Markets IS M R Table 1-1: Global Economic Prospects (in terms of Capital Flows and International Trade) Item I Net Capital Flows to Emerging Market and Developing Countries (US$ billion) i Net Private Capital Flows (a+b+c) a) Net Private Direct Investment b) Net Private Portfolio Investment c) Net Other Private Capital Flows ii Net Official Flows II World Trade in Goods and Services @ (percent) i Trade Volume (exports and imports) ii Export Volume a) Advanced Economies b) Emerging Market & developing Countries 12. the European debt crisis and global slowdown have been posing serious challenges to the Indian economy.0 150. hardening of interest rates.7 -89.3 268. The moderation in the services sector growth was led by sharp deceleration in ‘construction’ and ‘trade.0 13.7 409.8 3.0 -258. The slowdown in the Indian economy began in Q2 of 2011-12. Turkish lire and Mexican peso losing 15 percent or more against the US dollar in the one year up to August 2012. slowdown in consumption expenditure (especially in interest-rate sensitive commodities). it has also made India become vulnerable to global shocks. developing country currencies continued to depreciate in 2012. most currencies experienced huge exchange rate volatility vis-à-vis the US dollar.3 6.4 percent.7 5. Despite the moderation.8 -28. Govt.4 129. transport and communication’. as evidenced by the global financial crisis of 2008.8 133. After a recovery from the global financial crisis with two successive years (2009-10 and 2010-11) of robust growth of 8. with major currencies such as the South African rand.1 62.Annual percentage change for world trade of goods and services.0 240.nseindia.2 Note: P .5 percent in 2011-12. More recently. the predominance of the services sector remains a unique feature of the overall growth story and the process of structural change in India. The sudden reversal in flows and weakening currencies prompted several countries to intervene by selling off foreign currency reserves in support of their currencies.Projections. Ibid. The slowdown was on account of moderation in demand (both domestic and external).0 462.7 percent. Brazilian real.1 -108. The deceleration in the Indian economy in 2011-12 was on account of all round fall in demand – consumption (both private and government). however. 7 6 7 Reserve Bank of India Annual Report. the growth in the industrial sector declined mainly due to sharp moderation in manufacturing sector growth. the GDP growth decelerated sharply to a nine-year low of 6.2 4.7 12.

India’s trade deficit increased in absolute terms to US$ 189.2 percent of GDP) as compared www. These indicators reflect the weakening external sector resilience of the Indian economy and thus. the year 2011-12 was characterized by a burgeoning trade and current account deficit (CAD). exports recorded a sharper decline of 7.nseindia.I S MR Macroeconomic Developments and Securities Markets 8 Chart 1-2: Sectoral Contribution and Growth to India’s GDP Source: CSO The sluggish growth of the economy has been accompanied by high inflation. the reduction in indirect taxes on petroleum products. rising external debt and deteriorating international investment position. there could be another considerable slippage in 2012-13 unless immediate remedial measures are undertaken.com .3 percent). The current account deficit (CAD) increased both in absolute terms as well as a proportion of GDP in 2011-12.3 percent of GDP) in 2011-12 as compared to US$ 130. The non-food manufactured products inflation moderated from a high of 8. before softening moderately in December. It has since remained sticky in the range of 7. On the fiscal sector. even as growth is slowing.8 billion (10.8 percent of GDP).2 billion (4. The slippage was due to many factors. present a formidable challenge for policy makers.4 percent in November 2011 to below 5 percent by March 2012. subdued equity inflows.1 percent. the government has announced some policy measures since the second week of September 2012 towards fiscal consolidation such as reducing fuel subsidies and clearing stake sales in select public enterprises.6 billion (7. among others.8 percent of GDP) in 2010-11. The high inflation phase that started in Q4 of 2009-10 has persisted.5-6. The firming up of international crude oil prices and the resultant increase in fuel subsidies. On the external front.2-8. precious metals etc.0 percent. shortfall in revenue due to more than anticipated slowdown in economic growth and lower than budgeted disinvestment receipts contributed to the fiscal slippage in 2011-12. Economic slowdown in advanced countries and its spill-over effects in EMEs coupled with rising crude oil and gold prices were responsible for the sharp increase in trade deficit. oil and lubricant (POL) and higher imports of gold & silver. Inflation remained high at over 9 percent in the first eight months of 2011-12.6 percent of GDP) in 2011-12 to the realized fiscal deficit (5. relatively inelastic imports of petroleum.4 percent relative to the imports (4. depletion of foreign exchange reserves. The reasons behind the high inflation in recent months are (a) higher international prices of crude. Against this backdrop. both domestic and external. (b) revision in MSP prices for some of the essential commodities and (c) revision in petroleum prices in September 2012. During April – September 2012. reflecting widening trade deficit on account of subdued external demand. there was a considerable slippage from the central government’s budgeted fiscal deficit (4. The CAD in 2011-12 was US$ 78. The persistence of high inflation. has emerged as a major challenge for monetary policy. a level much higher than RBI’s comfort level of 5. although it has somewhat moderated in the recent months. Food inflation rebounded sharply since beginning of the year: from negative zone to the double digit level in April 2012 and has since been hovering around the same level. With the central government already accounting for 65 percent of the budgeted fiscal deficit in the first-half of 2012-13 itself.

4 224. Financing the huge fiscal deficit from internal domestic savings would potentially crowd out private investment.8 21.1 106.9 Macroeconomic Developments and Securities Markets IS M R with US$ 45.0 115.2 18. In addition. The net capital inflows were higher at US$ 67.0 percent in the corresponding period of the previous fiscal. remittances facilities for Indian expatriates have been streamlined. India was fortunate to receive larger net capital flows. Table 1-2: India’s Key External Debt Indicators Year External Debt (US$ billion) External Debt Service Debt to GDP Ratio (percent) (percent) Foreign Exchange Reserves as percent of Total External Debt 109.6 23. they fell short of financing current account deficit.3 20.1 14. the ratio of short-term debt to total external debt. such as the reserve cover of imports. pension funds and foreign central banks have now been permitted to invest in Government securities. capital inflows play a very important role in financing the CAD and it is very important to have a very high and sustainable net capital inflows.9 14.8 11.5 260.6 7. Although the CAD widened in 2011-12.5 14. Govt. insurance funds. Long term investors like Sovereign Wealth Funds (SWFs).nseindia.3 20. The limit on FII investment in G-Secs has been enhanced to US$ 20 billion from US$ 15 billion. the limit on investment in corporate bonds has been enhanced to US$ 45 billion from US$ 40 billion and the holding period • www.4 5. thus lowering growth prospects.8 99.7 Short-Term Debt as percent of Foreign Exchange Reserves 12.9 345. making it more difficult to finance the increasing CAD which in a sense is a result of global slowdown.9 billion compared to an inflow of US$ 3.com . • With deregulation of interest rates on rupee denominated non-resident Indian (NRI).8 4.1 7. The large twin deficits (CAD and fiscal deficit) pose significant risks to macroeconomic stability and growth sustainability. As India is structurally a current account deficit country. and the debt service ratio deteriorated during the year (Table 1-2).0 16. the ratio of foreign exchange reserves to total debt. resulting in some reserve drawdown in 2011-12. greater NRI deposit flows have been facilitated: in 2011-12. in turn. a number of policy measures have been undertaken to augment the capital flows into India.6 percent as compared to 4. mainly due to higher FDI inflows and NRI deposits.8 17.3 17.1 Reserves Cover of Imports (in months) 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (PR) 2012-13 (Apr-Sep) QE 139.1 9. increase in external debt.6 85.8 billion in 2011-12 as compared to US$ 62.8 20.0 billion in 2010-11. of India Against the backdrop.0 21.0 21. This. There has been enhancement in the investment limits for the FIIs in sovereign and corporate bonds.1 172.6 Source: Ministry of Finance.0 20. In April – September 2012.5 18. endowment funds.1 80. Further.4 10.2 billion in the previous fiscal.4 224.3 16.2 22.8 365. will deter capital inflows.9 billion (2.0 112.8 17.7 percent of GDP) in 2010-11. Though the capital inflows increased. the CAD has worsened further rising sharply to 4. Similarly. contributed by a marked increase in commercial borrowings and short-term debt has led to a deterioration of the external sector vulnerability indicators during 2011-12.3 18.3 26.1 4. Such flows have huge beneficial impact for bridging the CAD.0 - 11. multi-lateral agencies.8 4.9 305.4 9.4 19.7 4.6 12. Key external sector vulnerability indicators.7 Short-Term Debt as percent of Total External Debt 14.6 28.6 138.3 6. NRI deposit flows witnessed a sharp rise at US$ 11.

October. Department of Economic Affairs. World Bank (2012). Volatility in the equity market has fallen as reflected in a decrease in the volatility of the benchmark index S&P CNX Nifty 50. October. IMF (2011). The secondary market has been affected too. June. Second Quarter Monetary Policy Review. IMF (2012). increasing the limit for refinancing the Rupee loans out of ECBs. the resource mobilized through public and rights issues has fallen from about Rs 144 billion in the first half of 2011-12 to Rs 100 billion during the same period in 2012-13. References: Government of India (2012).9 in September 2012. a number of measures such as increasing the limit for availing of external commercial borrowing (ECB) under the automatic route. www.4 percent in September 2011 to 0.nseindia. In the primary market. A new scheme allowing the Qualified Foreign Investors (QFIs) to invest up to US$ 1 billion in corporate bonds has been introduced.I S MR Macroeconomic Developments and Securities Markets 10 and residual maturity requirements for bonds in the infrastructure sector have been reduced.7 percent a year ago.com . Annual Report.4 billion in the first half of 2012-13 compared to US$ 2. Financial Stability Report. the average daily market turnover during the first half of 2012-13 has fallen by 9 percent from the level prevailing in the corresponding period of 2011-12. December. India Economic Update. June. Net FII investment stood at US$ 8. have been taken to rationalize the regulatory framework for ECBs. Global Financial Stability Report. October. RBI (2012).3 percent in September 2012 from 65. Amidst these gloomy trends. “Mid-Year Economic Analysis 2012-13”. While the market-cap to GDP ratio has fallen marginally to 64. Ministry of Finance. RBI (2012). September. India’s financial markets–particularly securities markets--were also affected by the global slowdown as reflected in some of the following indicators. from 1. • Further. World Economic Outlook. RBI (2012). new US$ 10 billion scheme of ECBs for export earners. etc.1 billion in the corresponding period of the previous year. there were some green shoots in the securities market.

as well as the supply of quality securities and non-manipulated demand for them in the market. These intermediaries function to help both the issuers and the investors to achieve their respective goals. who are surplus savers.877 2.nseindia. together with the broad trends in different segments of the market in 2011-12 have been outlined.827 2.203 4. The regulator ensures a high service standard from the intermediaries.224 1.765 250 19 19 2 2 4 10.808 1. There are a large variety and number of intermediaries providing various services in the Indian securities market (Table 1-3).11 Macroeconomic Developments and Securities Markets IS M R Section-II: Structure and Trends of the Indian Securities Markets in 2011-2012 In this section. who issue securities to raise funds.008 83.com .753 251 19 FY 2011 1 4 2 FY 2012 1 4 2 As on Sep 30.201 74.165 4. 2012 1 4 2 Brokers (Cash Segment) ** Corporate Brokers (Cash Segment) Brokers (Equity Derivatives) Brokers (Currency Derivatives) Sub-brokers FIIs Portfolio Managers Custodians Contd. This process of mobilizing the resources is carried out under the supervision and overview of the regulators. The securities market has essentially three categories of participants—the issuer of the securities. The investors. The issuers are the borrowers or deficit savers. The intermediaries are the agents who match the needs of the users and the suppliers of funds for a commission. the basic structure of the Indian securities market as it exists now.141 1. and the intermediaries.337 2. the investors in the securities. deploy their savings by subscribing to these securities. The regulators develop fair market practices and regulate the conduct of the issuers of securities and the intermediaries.774 2. www.173 77.416 2. Table 1-3: Market Participants in Securities Market Market Participants Securities Appellate Tribunal (SAT) Regulators* Depositories Stock Exchanges With Equities Trading With Debt Market Segment With Derivative Trading With Currency Derivatives 19 2 2 4 10.268 4. They are also in charge of protecting the interests of the investors.111 2.722 267 17 19 2 2 4 10.

Market Participants Registrars to an issue & Share Transfer Agents Merchant Bankers Bankers to an Issue Debenture Trustees Underwriters Venture Capital Funds Foreign Venture Capital Investors Mutual Funds Collective Investment Schemes KYC Registration Agency (KYC) Macroeconomic Developments and Securities Markets 12 FY 2011 73 192 55 29 3 184 153 51 1 -- FY 2012 74 200 57 31 3 212 176 49 1 -- As on Sep 30. it is known as private placement. where securities are traded for future delivery and payment. Over the past few years. only two exchanges in India—the National Stock Exchange of India Ltd. All the spot trades where securities are traded for immediate delivery and payment occur in the OTC market. DEA. **Including brokers on Mangalore SE (58). and the government (central as well as state). The Indian market has gained from foreign inflows through the investment of Foreign Institutional Investors (FIIs). Following the implementation of reforms in the securities industry in the past few years.I S MR Contd. The clearing corporation acts as a counterparty and guarantees settlement. The primary market provides the channel for the creation and sale of new securities. they are traded in the stock (secondary) market. RBI & SEBI. There are two major types of issuers of securities—corporate entities. who issue mainly debt and equity instruments. Magadh SE (197). (NSE) and the Bombay Stock Exchange (BSE)—provide trading in Futures and Options. 2012 75 202 57 31 3 211 182 49 1 4 * DCA. namely.nseindia. HSE (303). International Scenario Global integration—the widening and intensifying of links—between high-income and developing countries has accelerated over the years. India ranked 11th in terms of market capitalization. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. it is a public issue. The securities issued in the primary market are issued by public limited companies or by government agencies. 17th in www. A variant of the forward market is the Futures and Options market. SKSE (399). If anybody can subscribe for the issue. The exchanges in India follow a systematic settlement period. Source: SEBI Market Segments The securities market has two interdependent and inseparable segments. if the issue is made available only to a select group of people. As per Standard and Poor’s Fact Book 2012. A variant of the secondary market is the forward market. while the secondary market deals in the securities that were issued previously. The trades executed on exchanges are cleared and settled by a clearing corporation. the new issues (primary) market and the stock (secondary) market. namely. The other option is to trade using the infrastructure provided by the stock exchanges. which issues debt securities (dated securities and treasury bills). The secondary market operates through two mediums. the over-the-counter (OTC) market and the exchange-traded market. All the trades taking place over a trading cycle (day = T) are settled together after a certain time (T + 2 day). Indian stock markets have stood out in the world ranking. Once new securities are issued in the primary market. Most of the trades in government securities take place in the OTC market. The OTC markets are informal markets where trades are negotiated. the financial markets have become increasingly global. Presently.com . The resources in this kind of market are mobilized either through a public issue or through a private placement route.

22 2011 27.279 21.640.258.007.33 81.04 91.191 255.59 38.17 2010 27.35 89.525 1.179 4.93 ---95.083 408.08 trillion in 2011 (US $ 54.376 1.37 47.454.952 340.98 133.0 2011 33. of listed Companies 2009 24.762.004.568.70 214.722 4.024 1.707 4.34 56.7 percent at the end of 2011.5 2010 39.038 17. Table 1-4: International Comparison of Global Stock Markets International Comparison Markets Developed Market Australia France Germany Japan Korea Singapore UK USA Emerging Markets China India Russia Brazil Indonesia Malaysia Mexico World Total USA as percent of World India as percent of World Market Capitalisation (US $ mn) 2009 33.553 1.456 1.08 128.93 ---68.401 24.62 98.685 994.553 8.208 1.389.459 3.860 1.235 861.766 2.76 157.691 45.001 4.28 72.591 1.540.63 49.66 100.07 74.565 47.796.27 51.107.3 100.730 1.83 203.913 901 571 3.646 1. 2012 and World Development Indicators.32 66. the US alone accounted for about 46. The turnover of all the markets taken together has increased from US $ 65 trillion in 2010 to US $ 66.531.534 454.286 13.171 22.056 4.320 1.com .42 10.969 390.370 796.098 1.782 8.217 370. Korea has been classified as developed markets from 2010 onwards.169.201.42 63. Market Capitalisation ratio is computed as a percentage of GDP.568 3.43 103.961 1. Source:S&P Global Stock Market Factbook.46 90.13 Macroeconomic Developments and Securities Markets IS M R terms of total value traded in stock exchanges.077.848.7 2.913.107 395.85 29.72 80.47 170.57 33.772 3.547 1. World Bank www. the market capitalization of all the listed companies taken together across all the markets stood at US $ 45.309.892 836.81 46.056 2. Despite having a large number of companies listed on its exchanges. while the Indian listed companies accounted for 2.60 105.015.32 Note: Listed companies in India pertain to BSE.882 941 601 3.792 462 2.926.922 893 670 3.53 128.62 Market Capitalisation Ratio (in percent) 2009 2010 2011 No.228. The stock market capitalization for some developed and emerging countries is shown in Chart 1-3.198.566 360.8 2.1 percent of the total world turnover in 2011.4 3.063 4.55 123.821 34.869 31. Significantly.379.51 trillion in 2010).nseindia.77 66.031 15.635 1.955 279 377 398 960 125 48.099.345 54.424 1. As can be observed from Table 1-4.71 42.164 1.377.4 percent at the end of 2010 to 34.091 3.99 74.13 21.497 1.09 142.049 1.987 345 373 420 957 130 48.732 9.22 87.545.412 31.48 ---136.167.778 459 2.837 1.179.202. The share of the US in worldwide market capitalization increased from 31.26 32.073 1.388 410.90 130.3 percent of the worldwide turnover in 2011. and 30th in terms of turnover ratio.88 120.444 15.089.511.615.488 1.138.184.978 15.03 10.707 11.456 5.972.690 1.082.675 2.335 178.43 38.040 1.4 trillion in 2011.112 327 366 440 941 128 49.462 310.297.429.781 461 2. India accounted for a meager 1.700 4.302 308.413 1.17 60. as of December 2011.3 percent of the total market capitalization at the end of 2011.342 5.77 10.01 69.

1 75.553 * Aggregates not preserved as data for high-income economies are not available for 2008.I S MR Macroeconomic Developments and Securities Markets 14 Chart 1-3: Stock Market Capitalization (as percentage of GDP) Source:S&P Global Stock Market Factbook.758 2. Africa South Asia Sub-Saharan Africa India World 62.120 3962 3610 1417 717 6123 820 4.9 58 44.7 Turnover Ratio (percent) 2009 187.446 1.nseindia.5 48. there has been an increase in the market capitalization as a percentage of Gross Domestic Product (GDP) in the high income countries.9 38.2 56. while it has remained at the same levels for middle income and low & middle income countries.6 percent at the end of 2009 to 93.012 6.0 102.9 55.1 27.0 46.6 percent and for low and middle income countries it was 72.4 Listed Domestic Companies 2009 31. The total number of listed companies stood at 30.9 72. World Bank www.8 percent for the low and middle-income countries in 2011.8 57.6 91.2 46.6 81.214 18.987 47.4 55.198 9.364 948 4.737 for the middle-income countries.2 2010 95.7 59.457 1.9 76. 18.9 149.6 88.1 85.8 154. Source: World Development Indicators 2012.0 91.339 for the low and middle-income countries at the end of 2011.0 103.9 percent for the high-income countries at the end of 2010 while for middle income countries it was 72.2 72. and 19.5 37.6 percent in 2010.0 50. The turnover ratio.007 6.737 19.4 19.9 73.2 2009 89.1 28.8 146.339 5.1 79. 2012 and World Development Indicators.8 213.6 122. as is evident from Table 1-5.5 93.778 17.946 -2010 29.7 73.181 4.963 1.1 46.3 133.6 72.497 4.819 16. which is a measure of liquidity. was 143 percent for the high-income countries and 102.4 37.9 51.368 1.com .112 49.0 2011 143.574 16.6 85.9 47 148.0 73.214 for the high-income countries.5 101.5 55. World Bank.8 52.3 -2010 128.3 121. The market capitalization as a percentage of GDP in India increased from 85.3 154.5 116.1 percent.071 2011 30.5 68.1 213. World Bank According to the World Development Indicators 2012.8 229.1 100.6 34.9 49. Table 1-5 : Select Stock Market Indicators Markets Market Capitalisation as percent of GDP 2008 High Income Middle Income Low & Middle Income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & N.7 88. The market capitalization as a percentage of GDP was 95.400 932 5.4 31.

2 percent in 2011–2012 from 89.2 0.1 0. -2. The all-India market capitalization ratio decreased to 70.8 85.3 4.2 52. Mutual funds include units of UTI.191 billion (US $ 1. (More details are provided in Chapter 2).8 percent of financial savings in deposits.3 percent to ` 27 billion in 2011–2012. To sum up.8 -1.9 percent in 2010-2011.9 100 2011-12 P 11. banking and bonds of PSUs.9 39.3 100 Securities Market Total R: Revised P: Preliminary Estimates Note: Here other securities include shares and debentures of private corporate business.7 -2.nseindia. 38.0 -0. Secondary Market The exchanges in the country offer screen-based trading system. and other securities (Table 1-6).7 percent in insurance/provident funds.3 89. which has increased in comparison to 85.15 Macroeconomic Developments and Securities Markets IS M R Household Investments in India According to the RBI data.0 0. Source: RBI Annual Report 2011-12 Primary Market An aggregate of ` 9. Table 1-6: Savings of Household Sector in Financial Assets Financial Assets Currency Fixed income investments Deposits Insurance/Provident & Pension Funds Small Savings Mutual Funds Government Securities Other Securities 2009-10 R 9.0 0.3 4.3 percent in small savings.3 percent of the domestic total resource mobilization by the corporate sector. The market capitalization across India was around ` 62. It is used as a measure that denotes the importance of equity markets relative to the GDP.5 41.3 0. www. There were 10.690 billion in 2010-11 (an increase of 14.6 36. the household sector invested 52. The market capitalization has grown over the period.8 85.268 trading members registered with SEBI at the end of March 2012 (Table 1-7).2 percent).926 billion was raised by the government and the corporate sector in 2011–2012.2 percent of the household financial savings during 2011–2012. units of mutual funds.8 38.2 3.215 billion) at the end of March 2012. Resource mobilization through Euro Issues dropped significantly by 71. and -0. fixed-income-bearing instruments were the preferred assets of the household sector.3 -0. Market capitalization ratio is defined as the market capitalization of stocks divided by the GDP.9 45.3 -1. In the fiscal year 2011-2012. It is of economic significance since the market is positively correlated with the ability to mobilize capital and diversify risk. investments in fixed income instruments accounted for 89.0 0.3 4. compared to ` 8. Private placement accounted for 93.9 100 2010-11 R 13.8 percent in the securities market including government securities. indicating that more companies are using the trading platform of the stock exchange.com .2 percent in 2010-11.

493 1.Table 1-7: Select Indicators in the Secondary Market Capital Market Segment of Stock Exchanges Sensex Market Cap.960 381.721.9 2004-05 9.508.341 1.2 70.859 1.777 79.54 2.423.878 189.1 35.054 47.984.569 119.288.573 122.381 90.687 1129.860 2.083.5 15.809.250 12.501 2.103 65.081 2007-08 9.990 3.016 7.209.022 4.443 3821.41 38.33 10.305.698 130.63 2.668.269 Turnover (` mn) Turnover Turnover On WDM (US $ mn) Ratio Segment of (percent) NSE (` mn) On SGL (`mn) On WDM On SGL Segment (US $ mn) of NSE (US $ mn) Turnover (` mn) Turnover (US $ mn) Non-Repo Government Sec Turnover Derivatives I S MR At the End of Financial No.445.6 89.521 345.080 7.456 88.003.708.280.nseindia.010 1.110 280.404.955 12.147 54.330 1.054 124.442 122.724 586.053.582.8 19.929.701.326 373. turnover for capital market segment of stock exchanges includes only NSE and BSE.20 3.598 2011-12 10.432 110.049.658 189.843.802.6 13.988 5.430 74.067 7.048.487 4734.151 57.430.641.180 1.014.222.119.50 28.492.8 61.6 11.333 21.145 6.643 133.061 9.850.982.4 3.336.160 1.203 5833.492.643.778 49.71 4.782 1148.834 216.534 36.800 3.480 4.030 535.Capi(` mn) tion talisation (US $ mn) Ratio (percent) 7.825 158.035.280 93.14 8.636. For April-Sep 2012.227.958 293.221.690 25.005 98.741.758.667 194.088 86.335 3402.911.368 1771.718 Apr-Sep'12 10.190 17.081.720.981 153.56 9.7 2005-06 9.268 5295.762.900 617.088 98.497.492 4.519 978.772 5249.532.237 3.098 203.480 6. of Nifty 50 Year Brokers 2000-01 3.212 677.202.170 133.638.286 152.644.0 30.466 5.49 9.4 51.269.2 62.086 2001-02 9.881 34.887 51.110 288.958.952 2010-11 10.134 109.128 2035.919 2006-07 9.283.469 814.708 374.36 8.3 16.488 9.302.080.851 54.715 665.191.820 681.613 52.Market Market italisation Capitalisa.152.5 30.4 16.2 2003-04 9.958 248.667 99.689.6 23.708.923.131 101.165 5703.319.901.293.205 1.198 158.280 68.643 199.590 1.900 48.604.46 55.2 70.520.03 23.493.921.168.161 89.038.869 3.335.133 392. CMIE Prowess and NSE Macroeconomic Developments and Securities Markets www.958 5.4# 15.036 28.280 9.4 861 21.392 2008-09 9.4 95.215.590.527.55 2002-03 9.09 4.7 5.673 40.018.488.635 321.422.1 17.072.628 3021.688.37 46.122 56.632 293.469.202.3 55. Source: SEBI.2 68.224 1.398.953 6.374 153.8 16.com 16 .124 4.497 13.738 607.187.047 6.6 17.137 93.180 183.0 29.142 125.704.327.608.129 Note: # NSE staff estimates.712 91.787 176.940 388.421 90.212 303.366.7 65.242.628 81.3 18.970 756.91 12.753 85.6 13.013.217.645.466.123 493.124.780 1.0 2009-10 9.604.630 7.76 2.354 164.385 7.308.

3 percent in 2003–2004. NSE has created a niche for itself in terms of derivatives trading in various instruments (this is discussed in detail with statistics in Chapter 6). EURO-INR and JPY-INR. and in 2006–2007. 1996 which provides for electronic maintenance and transfer of ownership of demat (dematerialized) shares. The currency derivatives trading in India started in August 2008 at NSE with currency futures on the underlying USD-INR exchange rate followed by futures trading in currency pairs such as GBP-INR. money market securities and securities derived from these securities.582 billion in 2010-2011. and witnessed a year-on-year increase of 67. The orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal (SAT). gold-related securities. 2002. Government Securities The aggregate trading volumes in central and state government dated securities on SGL increased from ` 4.222 billion) in 2009–2010. The powers of the DEA under the SCRA are also concurrently exercised by SEBI. again peaked at ` 55. the Ministry of Company Affairs (MCA). 1956.com . In India. and ready forward contracts in debt securities are exercised concurrently by the RBI. The powers under the Companies Act relating to the issue and transfer of securities and the non-payment of dividend are administered by SEBI in the case of listed public companies and public companies proposing to get their securities listed. 1956. 1956 (SCRA) can be exercised by the DEA while a few others can be exercised by SEBI. The regulator ensures that the market participants behave in a certain manner so that the securities markets continue to be a major source of finance for the corporate sector and the government while protecting the interests of investors. the Reserve Bank of India (RBI).4 percent. www.901 billion (US $ 535 billion) in 2005–2006. The currency derivatives trading in India increased by 17. It stood at ` 9.035 billion in 2010–2011 to ` 4. Regulatory Framework At present.014 billion (US $ 665 billion) from ` 23. and SEBI.964 billion. (c) the Securities Contracts (Regulation) Act.209 billion (US $ 374 billion). Regulators The absence of conditions for perfect competition in the securities market makes the role of the regulator extremely important. The SEBI Act and the Depositories Act are mostly administered by SEBI. the cash market witnessed a fall of 15. Trading volume.720 billion in 201112 from 321.1 percent to ` 46. and transfer of securities. (b) the Companies Act.17 Macroeconomic Developments and Securities Markets IS M R The trading volumes on the stock exchanges had picked up from 2002–2003 onwards. allotment. Most of the powers under the Securities Contracts (Regulation) Act.689 billion (US $ 203 billion) in 2002–2003. while in 2011-2012.824 billion (US $ 1.048 billion) in 2010–2011. and disclosures to be made in public issues. In 2010-2011. Since last two years. The rules under the securities laws are framed by the government and the regulations by SEBI. the turnover in all India cash market has plunged continuously. The powers in respect of the contracts for sale and purchase of securities.8 percent was witnessed in trading volumes in 2007-2008 followed by a fall of 24.643 billion in 2011–2012.9 percent in 2008-2009.7 percent to ` 98. (d) the Depositories Act. The upsurge continued for the next few years. it dropped by 25. the responsibility for regulating the securities market is shared by the Department of Economic Affairs (DEA).5 percent to ` 345. 1992. reaching ` 29. Significant increase of 76.6 percent to ` 34. Derivatives Market The equity derivative market turnover on the Indian exchanges increased by 7. the turnover showed an increase of 21. currency options trading was allowed on USD-INR. which sets the code of conduct for the corporate sector in relation to issuance. the five main Acts governing the securities markets are (a) the SEBI Act. standing at ` 16. which provides for the regulation of transactions in securities through control over stock exchanges.nseindia.168 billion (US $ 1. The SROs ensure compliance with their own rules as well as with the rules relevant to them under the securities laws.843 billion. Later in October 2010. and (e) the Prevention of Money Laundering Act. All these rules are administered by SEBI.

and (c) regulating the securities market. It gives the Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision. Besides prescribing the punishment for this offence. allotment. It also regulates underwriting. As a condition of recognition. It can conduct enquiries. which have to conform to the minimum listing criteria set out in the Rules. (b) dematerializing the securities in the depository mode. Securities Contracts (Regulation) Act.com . the banking companies. and bonus issues. and the Depositories Act. without making the securities move from person to person. particularly in the fields of company management and projects. restricting the company’s right to use discretion in effecting the transfer of securities. 1992: The SEBI Act. and aims to prevent undesirable transactions in securities.” anyone who acquires. SEBI has full autonomy and the authority to regulate and develop an orderly securities market. and inspection of all concerned. Under these Acts. In order to streamline the settlement process. to appoint a principal officer. as well as various aspects relating to company management. and transfer of securities. and to allow the confiscation of property derived from or involved in money laundering. The stock exchanges determine their own listing regulations. and Regulations made thereunder. 1996: The Depositories Act. the Act provides other measures for the prevention of money laundering. It provides the standard of disclosure in public issues of capital. and the management’s perception of risk factors. the Act envisages the transfer of ownership of securities electronically by book entry. Depositories Act. a stock exchange complies with the conditions prescribed by the Central Government.nseindia. etc. It has the powers to register and regulate all market intermediaries. 1956: This Act provides for the direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges. the supply of annual reports. Organized trading activity in securities takes place on a specified recognized stock exchange. and the transfer deed and other procedural requirements under the Companies Act have been dispensed with. in addition to all intermediaries and persons associated with the securities market. 1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of investors in securities. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities. etc. the Government and SEBI issue notifications. and for the prevention of unfair trade practices. insider trading. to maintain certain records. Prevention of Money Laundering Act. or knowingly enters into any transaction that is related to the proceeds of crime either directly or indirectly. Rules and Regulations The Government has framed rules under the SCRA. and adjudicate offences under the Act. owns. 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed. subject to certain exceptions. as well as to penalize them in case of violations of the provisions of the Act. (b) promoting the development of the securities market. and security by (a) making securities of public limited companies freely transferable. According to the definition of “money laundering. the payment of interest and dividends. the SEBI Act. Companies Act. possess. or conceals or aids in the concealment of the proceeds or gains of crime within India or outside India commits the offence of money laundering. 2002: The primary objective of this Act is to prevent money laundering. the use of premium and discounts on issues. etc. audits. The Act also casts an obligation on the intermediaries. have also laid down their own rules and regulations. 1956: It deals with the issue. and circulars that the market participants need to comply with. and other information. and (c) the listing of securities on the stock exchanges.I S MR Legislations Macroeconomic Developments and Securities Markets 18 The SEBI Act. or transfers any proceeds of crime. to furnish information of such prescribed transactions to the Financial Intelligence Unit-India. (b) contracts in securities. Rules. The Act has made the securities of all public limited companies freely transferable. rights. information about other listed companies under the same management. accuracy. SEBI has framed regulations under the SEBI Act and the Depositories Act for the registration and regulation of all market intermediaries. The SROs. guidelines. and (c) providing for the maintenance of ownership records in a book entry form. like the stock exchanges. www.

and the establishment of a clearing corporation. debt. Index Options. and (e) meeting the international benchmarks and standards. NSE has been playing the role of a catalytic agent in reforming the market in terms of microstructure and market practices. Stock Futures. It has helped in shifting the trading platform from the trading hall in the premises of the exchange to the computer terminals at the premises of the trading members located across the country. It provides a screen-based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location. the reduction of the settlement cycle.19 Macroeconomic Developments and Securities Markets IS M R Role of NSE in the Indian Securities Market The National Stock Exchange of India (NSE) was recognized as a stock exchange in April 1993. and subsequently. Its product. whereby the ownership.com . Dow Jones Industrial Average and FTSE 100 have been introduced for trading on the NSE. and settlement mechanism. Forwards Rate Agreements. professionalization of the trading members. www. 2011. The Exchange started providing trading in retail debt of government securities in January 2003. and futures on global indices such as S&P 500 and DJIA and S&P 500. and in the Equity Derivatives segment in June 2000. namely. NSE started providing trading in currency option in October 2010. clearing. NSE provides a trading platform for of all types of securities—equity. a fine-tuned risk management system. Settlement risks have been eliminated with NSE’s innovative endeavors in the area of clearing and settlement. and Term Deposits in the country. The future contracts for trading on Dow Jones Industrial Average (DJIA) and futures and options contracts on S&P 500 were introduced on August 29. NSE’s Equity Derivatives segment provides the trading of a wide range of derivatives such as Index Futures. the FIMMDA NSE MIBID/MIBOR—which is now disseminated jointly with the FIMMDA—is used as a benchmark rate for the majority of the deals struck for Interest Rate Swaps. (c) providing a fair. the market today uses state-of-the-art technology to provide an efficient and transparent trading. It enables members from across the country to trade simultaneously with enormous ease and efficiency. and trading in currency futures in August 2008. and clearing and settlement practices and procedures. 1956 in April 1993. the dematerialization and electronic transfer of securities. to the personal computers in the homes of investors. The high level of information dissemination through its online system has helped in integrating retail investors on a national basis. and service standards have become industry benchmarks. NSE was set up with the objectives of (a) establishing a nationwide trading facility for all types of securities. it commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. management. The futures and options contracts on FTSE 100 were introduced on May 3. Stock Options. products. technology. these objectives have been realized. This has completely eliminated any conflicts of interest and has helped NSE to aggressively pursue policies and practices within a public interest framework. which operates on a strict price/time priority. Floating Rate Debentures. and trading rights are in the hands of three different sets of people. Its Zero Coupon Yield Curve as well as the NSE-VaR for Fixed Income Securities have also become very popular for the valuation of sovereign securities across all maturities irrespective of liquidity. The standards set by NSE in terms of market practices. Derivatives on global indices such as S&P 500. Consequently. NSE’s Capital Market segment offers a fully automated screen-based trading system. Within a short span of time. NSE has set up an infrastructure that serves as a role model for the securities industry in terms of trading systems. The WDM segment provides the trading platform for the trading of a wide range of debt securities.nseindia. Right from its inception. efficient. and have facilitated the pricing of corporate papers and the GOI Bond Index. and transparent securities market using an electronic trading system. and the Exchange has played a leading role in transforming the Indian Capital Market to its present form. the Exchange has adopted the purest form of a demutualized setup. known as the National Exchange for Automated Trading (NEAT) system. and are being replicated by other market participants. (b) ensuring equal access to all investors across the country through an appropriate communication network. in the Capital Market (CM) segment in November 1994. (d) enabling shorter settlement cycles and book entry settlements. 2012. and derivatives. Following its recognition as a stock exchange under the Securities Contracts (Regulation) Act.

and they were allowed for trading on August 31. which commenced on August 29.701 80. and the JPY-INR was allowed. It uses satellite communication technology to energize participation from about 1. In recognition of the fact that technology will continue to redefine the shape of the securities industry.7 47.497.999 percent. www.724. while USD-INR currency options were allowed for trading on October 29. the EUR-INR. NSE stresses on innovation and sustained investment in technology to remain ahead of competition.739 Trading Value for 2011-12 ` mn 28. It has an uptime record of 99. equity derivatives. Providing the services to the investor community and the market participants using technology at the cheapest possible cost has been its main thrust. trading in additional pairs such as the GBP-INR.2 81.191.469 6.I S MR Macroeconomic Developments and Securities Markets 20 NSE’s Currency Derivatives segment provides the trading of currency futures contracts on the USD-INR. called the National Exchange for Automated Trading (NEAT).356. is a state-of-the-art client-serverbased application. the NSE has established a disaster back-up site at along with its entire infrastructure. with 80. This site is a replica of the production environment at Mumbai. and currency derivatives) in 2011–2012. NSE chose to harness technology to create a new market design.965. The transaction data is backed up on near-real-time basis from the main site to the disaster back-up site through the 4 STM-4 (2.191. there is a uniform response time in the range of milliseconds. At the server end. Once again. 2010.108. The interest rate futures trade on the currency derivatives segment of the NSE.318 46. NSE proved itself the market leader. For all trades entered into the NEAT system.7 percent share in the equity derivatives segment in 2011–2012 (Table 1-8). As part of its business continuity plan.201 1. the NSE registered as the market leader. NSE’s Internet Based Information System (NIBIS) has also been put in place for online real-time dissemination of trading information over the Internet.047.7 90. The exchange believes that technology provides the necessary impetus for an organization to retain its competitive edge and to ensure timeliness and satisfaction in customer service.176 1.nseindia. all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users.176 60. NSE’s trading system.7 percent in equity trading and nearly 90. 2008. In February 2010.749.800+ VSATs from nearly 159 cities spread across the country. 2009. Table 1-8: Market Segments on NSE for 2011-12 (Select Indicators) Segments Market Capitalisation as of March 2012 ` mn CM Equity F&O Currency F&O Total Source: NSE 60.9 percent of total turnover (volumes in cash market.899 388.030 7.149 US$ mn 549.739 US $ mn 1.4 GB) high-speed links to keep both the sites synchronized with each other all the time.com .932 313. including the satellite earth station and a high-speed optical fiber link with its main site at Mumbai.965. contributing a share of 80. NSE has been continuously undertaking capacity enhancement measures in order to effectively meet the requirements of the increasing number of users and the associated trading loads.128.0 Market Share (in percent) Technology and Application Systems in NSE Technology has been the backbone of the NSE. The NSE is the first exchange in the world to use satellite communication technology for trading.