CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

Project Work Of Financial Market Regulation

Topic: INDIAN FINANCIAL MARKET & ISSUE OF

DEMOETISATION

Name : Pushpanjali Kumari

Course : B.A. LLB. (Hons.)
Semester : 8th
Enrollment No. : CUSB1513125032
Submitted To : Dr. P.K. Das

ACKNOWLEDGEMENT
It is a great pleasure for me to present the final draft of the project topic. I
am very much obliged to my revered teacher Dr. Pradeep Kumar Das
(Assistant Professor) of Central University of South Bihar, Gaya who has
given me a task to complete the project work. I am very much helped by
him regarding the formation of this final project.
I express my heartfelt indebtedness to Dr. Pradeep Kumar Das who
showed me the path and helped me to understand the project topic. It was
not possible for me to make the final project if I was not being helped by
him. He acted as my mentor and also a guide to help me to understand the
whole of the provision and provided me with the proper synopsis of the
project work.
I would like to express my gratitude towards my parents for their kind co-
operation and encouragement which help me in completion of this final
draft.
I would like to express my special gratitude and thanks to the
computer lab assistant who provided me all the facilities regarding the
conditioned computer with a good wi-fi net.
My thanks and appreciations also go to my colleague in developing
the project and people who have willingly helped me out with their
abilities.

Thanks

RESEARCH TITTLE:
A detailed study on Indian Financial Market and impact of Demonetisation on
Financial market.

RESEACH METHODOLOGY:
The research methodology used by me is completely Doctrinal Research Method and used
SILC (Standard Indian Legal Citation) methodology in foot -noting in this assignment. I had
also followed the steps provided by my subject teacher cum mentor for doing this research
work.

RESEARCH PROBLEMS:

 Are the financial markets successful in issuing and subscribing shares at right time
and right place?
 What was the impact of demonetization on financial market?
 Do there is rapid growth in Indian financial market?

RESEARCH HYPOTHESIS:
 All financial assets and instruments are leniently issued and subscribe in financial
market.
 Demonetization had led to crisis in financial system.

LITERATURE REVIEW:
BOOKS REFFERED:

 M.Y. Khan, Indian Financial Market, MC Graw Hill Publication, 9 th

edition.
 E. Gordon, “Financial Markets and Services”, Himalya Publishing House,
10th edition, 2016.
 Dr. S Gursamy, ‘Essentials of financial service’, 2nd edition 2015.

These all proved very productive in formation of final draft of my project topic.
 INDEX

Sr. no. CONTENTS Pg no.

01. Introduction 05-06

02. Meaning and Definition of financial 07

market
03. Basic role of financial market 08-09

04. Scope of financial market 09

05. Potential and Feature of financial market 10

06. Functions of financial Market 11-12

07. Constituent of Financial Market 13-19

09. Other types of financial market 20

10. Regulators of financial market 21

11. Impact of demonetisation on financial 22-23

market
12. Conclusion 24

INTRODUCTION:
There was a time when India was primarily an agriculture based economy. But today the
service sector and the manufacturing sector contributes to about 75% of India’s GDP. Today
India is one of the fastest growing economies of the world. To sustain this kind of growth, a
robust financial market is essential. A country which does not have a robust financial market
cannot grow at a fast rate. It is the financial system that acts as a support service to the
economic growth. Financial System includes financial market and other financial institutions.
The financial market in India at present is more advanced than many other sectors as it
became organized as early as the 19th century with the securities exchanges in Mumbai,
Ahmedabad and Kolkata. In the early 1960s, the number of securities exchanges in India
became eight - including Mumbai, Ahmedabad and Kolkata. Apart from these three
exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune exchanges as well.
Today there are 23 regional securities exchanges in India.

A financial market is a market in which people and entities can trade financial securities,
commodities, and other fungible items of value at low transaction costs and at prices that
reflect supply and demand. It is mainly the place where financial assets are traded. Securities
include stocks and bonds, and commodities include precious metals or agricultural goods.
There are both general markets (where many commodities are traded) and specialized
markets (where only one commodity is traded). Markets work by placing many interested
buyers and sellers, including households, firms, and government agencies, in one "place",
thus making it easier for them to find each other. An economy which relies primarily on
interactions between buyers and sellers to allocate resources is known as a market economy
in contrast either to a command economy or to a non-market economy such as a gift
economy. Money always flows from surplus sector to deficit sector. That means persons
having excess of money lend it to those who need money to fulfill their requirement.
In business sectors the surplus money flows from the investors or lenders to the businessmen
for the purpose of production or sale of goods and services. So, we find two different groups,
one who invest money or lend money and the others, who borrow or use the money. The
financial markets act as a link between these two different groups. It facilitates this function
by acting as an intermediary between the borrowers and lenders of money. So, financial
market may be defined as ‘a transmission mechanism between investors (or lenders) and the
borrowers (or users) through which transfer of funds is facilitated’. It consists of individual
investors, financial institutions and other intermediaries who are linked by a formal trading
rules and communication network for trading the various financial assets and credit
instruments.

When we talk about financial market it includes:

 Efficient banking system,

 Strong security market,
 Reliable foreign exchange market,
 Commodity market,
 Insurance sector, and
 Regulatory services.

Presently India has all of this support system working transparently and efficiently. Financial
Markets facilitate the raising of capital (in the capital markets), the transfer of risk (in the
derivatives markets), and price discovery, global transactions with integration of financial
markets, the transfer of liquidity (in the money markets) and International trade (in the
currency markets).

MEANING AND DEFINITION:

Nobel laureate William Faulkner has rightly said that “You cannot swim for new horizons
until you have courage to lose sight of the shore.”

Financial market is a place where buyers and sellers engage themselves in a trade of assets
which comprise stocks, bonds, currencies, derivatives etc. via a middleman called broker. In
economics, typically, the term market means the aggregate of possible buyers and sellers of a
certain good or service and the transactions between them. The term "market" is sometimes
used for what are more strictly exchanges, organizations that facilitate the trade in financial
securities, e.g., a stock exchange or commodity exchange. Financial markets can be domestic
or they can be international.

The place where financial assets are traded is called financial market. The medium through
which financial instruments as such assets, stocks or shares are exchanged through variety of
players are called financial markets1.

According to Eugeme Bringham, the places where people or organisations wanting money
are brought together with those having surplus funds are called financial market.

Financial market, in a nutshell, is a treasure for those gutsy people who have the acumen
and guts to put everything at risk.

BASIC ROLES OF THE FINANCIAL MARKET:

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In a very simple economy, there are two sets of economic agents: households and firms.
Households save and the firms invest. It is the role of the financial sector to ensure that the
savings of the household sector reaches the firms, which need the resources for investment. In
reality the economy is of course much more complex than this overly simplified system. In a
real economy, savers include not only households but also firms and government. Similarly,
investments can be made by not only firms, but also households and the government.
However, even in a more complex economy, the main function of the financial system
essentially involves the mobilization of resources from those who have surplus and allocation
of these resources to those who face deficit.

In other words, the financial sector plays the role of an intermediary by ensuring smooth flow
of resources from those who have surplus funds to those who have a shortage of funds. The
second important role of the financial system is that of risk management. Every business
enterprise involves risk. The financial institutions provide a framework for evaluating these
risks. The financial market allows sharing, trading and transferring of risk among different
economic agents. The third role of the financial markets is to pool and communicate
information efficiently, so that market prices reflect available information. One of the
important requisite for the accelerated development of an economy is the existence of a
dynamic financial market2.

A financial market helps the economy in the following manner.

o Saving Mobilization:

Obtaining funds from the savers or surplus units such as household individuals, business
firms, public sector units, central government, state governments etc. is an important role
played by financial markets.

o Investment:

Financial markets play a crucial role in arranging to invest funds thus collected in those units
which are in need of the same.

o National Growth:

An important role played by financial market is that, they contributed to a nation’s growth by
ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive
purposed is also made possible.

o Entrepreneurship Growth:

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M.Y. Khan, Indian Financial Market, MC Graw Hill Publication, 9 th edition, p. 2.33
Financial market contributes to the development of the entrepreneurial claw by making
available the necessary financial resources.

o Industrial Development:

The different components of financial markets help an accelerated growth of industrial and
economic development of a country, thus contributing to raising the standard of living and
the society of well-being.

SCOPE OF THE INDIAN FINANCIAL MARKET:

Financial Market talks about the primary market, FDIs, alternative investment options,
banking and insurance and the pension sectors, asset management segment as well. With all
these elements in the India Financial market, it happens to be one of the oldest across the
globe and is definitely the fastest growing and best among all the financial markets of the
emerging economies. The history of Indian capital markets spans back 200 years, around the
end of the 18th century. It was at this time that India was under the rule of the East India
Company. The capital market of India initially developed around Mumbai; with around 200
to 250 securities brokers participating in active trade during the second half of the 19th
century.

The financial market in India at present is more advanced than many other sectors as it
became organized as early as the 19th century with the securities exchanges in Mumbai,
Ahmadabad and Kolkata. In the early 1960s, the number of securities exchanges in India
became eight - including Mumbai, Ahmadabad and Kolkata. Apart from these three
exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune exchanges as well.
Today there are 23 regional securities exchanges in India.
The Indian stock markets till date have remained stagnant due to the rigid economic controls.
It was only in 1991, after the liberalization process that the India securities market witnessed
a flurry of IPOs serially. The market saw many new companies spanning across different
industry segments and business began to flourish.
The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter
Exchange of India) in the mid-1990s helped in regulating a smooth and transparent form of
securities trading. The regulatory body for the Indian capital markets was the SEBI
(Securities and Exchange Board of India). The capital markets in India experienced
turbulence after which the SEBI came into prominence. The market loopholes had to be
bridged by taking drastic measures.3

POTENTIAL OF THE INDIA FINANCIAL MARKET:

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India Financial Market helps in promoting the savings of the economy - helping to adopt an
effective channel to transmit various financial policies. The Indian financial sector is well-
developed, competitive, efficient and integrated to face all shocks. In the India financial
market there are various types of financial products whose prices are determined by the
numerous buyers and sellers in the market. The other determinant factor of the prices of the
financial products is the market forces of demand and s upply. The various other types of
Indian markets help in the functioning of the wide India financial sector4.

FEATURES OF THE FINANCIAL MARKET IN INDIA:

o India Financial Indices - BSE 30 Index, various sector indexes, stock quotes, Sensex

charts, bond prices, foreign exchange, Rupee & Dollar Chart

o Indian Financial market news

o Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty,

company information, issues on market capitalization, corporate earnings statements

o Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading

activities, Interest Rates, Money Market, Government Securities, Public Sector Debt,

External Debt Service

o Foreign Investment - Foreign Debt Database composed by BIS, IMF, OECD,&

World Bank, Investments in India & Abroad

o Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity

Indexes

o Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes

o National and Global Market Relations

o Mutual Funds, Insurance

o Loans

o Forex and Bullion.

FUNCTIONS OF FINANCIAL MARKET:

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E. Gordon, “Financial Markets and Services”, Himalya Publishing House, 10 th edition, 2016, p. 11
Basically the function of financial market can be sub classified into two parts:

I. Intermediary function

II. Financial Function

I. Intermediary Function5:

a. TRANSFER OF RESOURCES

Financial market helps in transfer of resources from one unit to another who needs them.

b. INCREASING INCOME:

Increased amount in the form of dividend, profit, interest is function of financial market as it

enhances income.

c. PRODUCTIVE USE OF FUNDS:

Financial market helps investors by supplying different information so they can use funds in

productive manner.

d. CAPITAL FORMATION:

It is nothing but addition of capital. It generates capital.]

e. PRICE DETERMINATION:

Financial market allows for the determination of price of the traded financial assets through

the interaction of buyers and sellers.

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Dr. S Gursamy, ‘Essentials of financial service’, 2nd edition 2015, p. 5-6
 f. SALE MECHANISM:

Financial market provides a mechanism for selling of financial assets by an investor so as to

offer the benefits of marketability and liquidity of the assets.

g. INFORMATION:

The activities of the participants in financial market result in generation and consequent

dissemination of information to various segments of market.

II Financial Function6:

Various financial functions of financial market are as follows:

 Providing the borrower with funds so as to enable them to make investment plans.

 Providing the lender with earning assets so as to enable them to earn wealth by

deploying their wealth in productive ventures.

 Providing liquidity in market so as to facilitate trading.

CONSTITUENT OF FINANCIAL MARKET:

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Dr. S Gursamy, ‘Essentials of financial service’, 2 nd edition 2015, p. 6
The main constituents of financial market are:

Capital market and Money market.

Capital Market is again classified into:

Securities market and Product other than securities market.

Security market is again sub classified into:

Primary Market and Secondary Market.

CAPITAL MARKET
Capital markets are market for financial claims that are direct or indirect claims to capital. It
embraces all forms of lending and borrowing. It is referred as barometer of the economy. It
provides for the buying and selling of long term debt or equity backed securities. When they
work well, the capital markets channel the wealth of savers to those who can put it to long
term productive use, such as companies or governments making long term investments.
Capital Market may be defined as a market dealing in medium and long-term funds.

It is an institutional arrangement for borrowing medium and long-term funds and which
provides facilities for marketing and trading of securities. So it constitutes all long-term
borrowings from banks and financial institutions, borrowings from foreign markets and
raising of capital by issue various securities such as shares debentures, bonds, etc.

Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S.
Securities and Exchange Commission (SEC), oversee the capital markets in their designated
jurisdictions to ensure that investors are protected against fraud, among other duties7.

It Consists Of:

i. Stock markets, which provide financing through the issuance of shares or

common stock, and enable the subsequent trading thereof.

ii. Bond markets, which provide financing through the issuance of bonds, and

enable the subsequent trading thereof.

Features of Capital Market:

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Some of the features of capital market are as below:

a) In Capital market, funds are raised through issue of financial instrument such as
shares, debentures and bonds.
b) In capital market, individuals, institutions, banks and industrial financial institutions
are the main sources of supply of long term funds.
c) The capital market acts as a channel for the transmission of savings of surplus units to
deficit units which demand long term funds.
d) Capital market plays an important role in financial system by providing savings and
investment.

Capital market is divided into Guilt edge market and Security Market.

1. GUILT EDGE MARKET:

It is also known as government securities market. The market is meant for government and
semi-government securities. An important feature of the securities which are traded in this
market is that they are stable in value and also much sought by banks.

However, some of the main features of this guilt edged market are :

 There is a guaranteed return on investments.

 No speculation in securities.
 Institution based investors which are compelled by law to invest a portion of their
funds in these securities.
 Pre-dominated by such institutions like LIC, GIC.
 There is heavy volume of transactions necessitating negotiation of each transaction8.

2. SECURITIES MARKET:
The market in which securities are sold and purchased is called security market. It is divided
into two categories:

a) Primary market
b) Secondary market

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Dr. S Gursamy, ‘Essentials of financial service’, 2nd edition 2015, p. 15
 a) Primary Market:
The Primary Market consists of arrangements, which facilitate the procurement of long term
funds by companies by making fresh issue of shares and debentures. This market is also
called the new issue market. Companies make fresh issue of shares and/or debentures at their
formation stage and, if necessary, subsequently for the expansion of business. It is usually
done through private placement to friends, relatives and financial institutions or by making
public issue. The companies have to follow a well-established legal procedure and involve a
number of intermediaries such as underwriters, brokers, etc. who form an integral part of the
primary market. The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done through a
syndicate [disambiguation needed] of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this sale is an initial public
offering (IPO). Dealers earn a commission that is built into the price of the security offering,
though it can be found in the prospectus. Primary markets create long term instruments
through which corporate entities borrow from capital market.

Method of floating new issues in primary market is as under:

 Public issue.
 Offer for sale.
 Private placement.
 Right’s issue.

 Features Of Primary Markets Are9:

o This is the market for new long term equity capital. The primary market is the

market where the securities are sold for the first time. Therefore it is also called

the new issue market (NIM).

o In a primary issue, the securities are issued by the company directly to investors.

o The company receives the money and issues new security certificates to the

investors.

o Primary issues are used by companies for the purpose of setting up new business

or for expanding or modernizing the existing business.

o The primary market performs the crucial function of facilitating capital formation

in the economy.

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 o The new issue market does not include certain other sources of new long term

external finance, such as loans from financial institutions. Borrowers in the new

issue market may be raising capital for converting private capital into public

capital; this is known as "going public."

o The financial assets sold can only be redeemed by the original holder.

b) Secondary Market:
The secondary market known as stock market or stock exchange plays an equally important
role in mobilising long-term funds by providing the necessary liquidity to holdings in shares
and debentures. It provides a place where these securities can be encashed without any
difficulty and delay. It is an organised market where shares and debentures are traded
regularly with high degree of transparency and security. In fact, an active secondary market
facilitates the growth of primary market as the investors in the primary market are assured of
a continuous market for liquidity of their holdings. The major players in the primary market
are merchant bankers, mutual funds, financial institutions, and the individual investors; and in
the secondary market you have all these and the stockbrokers who are members of the stock
exchange who facilitate the trading. The secondary market, also called aftermarket, is the
financial market in which previously issued financial instruments such as stock, bonds,
options, and futures are bought and sold. Another frequent usage of "secondary market" is to
refer to loans which are sold by a mortgage bank to investors such as Fannie Mae and Freddie
Mac. The term "secondary market" is also used to refer to the market for any used goods or
assets, or an alternative use for an existing product or asset where the customer base is the
second market (for example, corn has been traditionally used primarily for food production
and feedstock, but a "second" or "third" market has developed for use in ethanol production).
With primary issuances of securities or financial instruments, or the primary market,
investors purchase these securities directly from issuers such as corporations issuing shares in
an IPO or private placement, or directly from the federal government in the case of treasuries.
After the initial issuance, investors can purchase from other investors in the secondary
market10.

The secondary market for a variety of assets can vary from loans to stocks, from fragmented
to centralized, and from illiquid to very liquid.

Function of Secondary Market:

In the secondary market, securities are sold by and transferred from one investor or
speculator to another. It is therefore important that the secondary market be highly liquid
(originally, the only way to create this liquidity was for investors and speculators to meet at a
fixed place regularly; this is how stock exchanges originated, see History of the Stock
Exchange). As a general rule, the greater the number of investors that participate in a given
market place and the greater the centralization of that market place, the more liquid the
market.

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M.Y. Khan, Indian Financial Market, MC Graw Hill Publication, 9 th edition, p. 4.38
Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the
investor's desire not to tie up his or her money for a long period of time, in case the investor
needs it to deal with unforeseen circumstances) with the capital user's preference to be able to
use the capital for an extended period of time.

Accurate share price allocates scarce capital more efficiently when new projects are financed
through a new primary market offering, but accuracy may also matter in the secondary
market.

MONEY MARKET:
The money market is a market for short-term funds, which deals in financial assets whose
period of maturity is upto one year. It should be noted that money market does not deal in
cash or money as such but simply provides a market for credit instruments such as bills of
exchange, promissory notes, commercial paper, treasury bills, etc. These financial
instruments are close substitute of money. These instruments help the business units, other
organisations and the Government to borrow the funds to meet their short-term requirement.
Money market does not imply to any specific market place. Rather it refers to the whole
networks of financial institutions dealing in short-term funds, which provides an outlet to
lenders and a source of supply for such funds to borrowers. Most of the money market
transactions are taken place on telephone, fax or Internet. The Indian money market consists
of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized
financial institutions. The Reserve Bank of India is the leader of the money market in India.
Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC,
UTI, etc. also operate in the Indian money market11.

Functions of the money market:

o Transfer of large sums of money.

o Transfer from parties with surplus funds to parties with a deficit.

o Allow governments to raise funds.

o Help to implement monetary policy.

o Determine short-term interest rates.

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Money Market Instruments

Certificate Of Deposit Time deposit, commonly offered to

consumers by banks, thrift institutions,

and credit unions.

Repurchase Agreements Short-term loans—normally for less than

two weeks and frequently for one day—

arranged by selling securities to an

investor with an agreement to repurchase

them at a fixed price on a fixed date.

Commercial Paper Unsecured promissory notes with a fixed

maturity of one to 270 days; usually sold

at a discount from face value.

Eurodollar Deposit Deposits made in U.S. dollars at a bank or

bank branch located outside the United

States.

Federal Agency Short-Term Securities (In the U.S.). Short-term securities issued

by government sponsored enterprises such

as the Farm Credit System, the Federal

Home Loan Banks and the Federal

National Mortgage Association.

Federal Funds (In the U.S.). Interest-bearing deposits

held by banks and other depository

institutions at the Federal Reserve; these

are immediately available funds that

institutions borrow or lend, usually on an

overnight basis. They are lent for the

federal funds rate.

Municipal Notes (In the U.S.). Short-term notes issued by

municipalities in anticipation of tax

receipts or other revenues.

Treasury Bills Short-term debt obligations of a national

government that are issued to mature in

three to twelve months.

Money Funds Pooled short maturity, high quality

investments which buy money market

securities on behalf of retail or

institutional investors.

Foreign Exchange Swaps Exchanging a set of currencies in spot date

and the reversal of the exchange of

currencies at a predetermined time in the

future.
OTHER TYPES OF FINANCIAL MARKET:
Besides Capital market and money market, there are other several categories of financial
market.

1) DEBT MARKET:

Debt Market is the market where funds are borrowed and lent, arrangements are made in such
a way that the borrower agrees to pay the lender the original amount of loan i.e. the principle
mount plus some specified amount of interest.

2) EURO BOND MARKET:

Euro Bond Market is the market where bonds are dominated in currencies other than the
country in which they are issued. It is international in character. It is issued by one country
for another.

3) EQUITY MARKET:

The Indian Equity Market is more popularly known as the Indian Stock Market. It is the place
where ownership securities are issued and subscribed.

4) FOREIGN EXCHANGE MARKET:

The foreign exchange market (forex, FX, or currency market) is a form of exchange for the
global decentralized trading of international currencies. Financial centers around the world
function as anchors of trading between a wide range of different types of buyers and sellers
around the clock, with the exception of weekends. EBS and Reuters' dealing 3000 are two
main interbank FX trading platforms. The foreign exchange market determines the relative
values of different currencies.

5) DERIVATIVES MARKET:

The derivatives market is the financial market for derivatives, financial instruments like
futures contracts or options, which are derived from other forms of assets. The market can be
divided into two, that for exchange-traded derivatives and that for over-the-counter
derivatives. The legal nature of these products is very different as well as the way they are
traded, though many market participants are active in both.

6) FINANCIAL SERVICE MARKET:

It comprises participants such as commercial banks etc. which provide various financial
services like ATM, credit card, debit card and lease and stock broking etc.

7) DEPOSITORY MARKET:
8) NON DEPOSITORY MARKET.

Other than these, there are other various numbers of financial market.
REGULATORS OF INDIAN FIANANCIAL MARKET:
The process of regulating the Indian financial market is a Top Down approach. It starts from
the Finance Ministry of India. The head of finance ministry is the Finance Minister himself.
Under the umbrella of Finance Ministry comes the following regulatory bodies:

#1. RBI

The Reserve Bank of India (RBI) makes and regulates:

 Monitory policies,
 Forex policies,
 Credit policies, and also
 Regulates banks.

#2. SEBI:

The Security and Exchange Board of India (SEBI) is the main regulatory which regulates the
primary and secondary market (stock exchange etc). This was established in 1992 and was
milestone development in security market. It has very important role to play in regulation of
financial market.

#3. IRDAI:

The Insurance Regulatory and Development Authority of India (IRDAI) regulates the
insurance sector of India.

#4. PFRDA:

The Pension Fund Regulatory and Development Authority (IRDA) regulates the pension
sector of India12.

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M.Y. Khan, Indian Financial Market, MC Graw Hill Publication, 9 th edition, p. 3.39
IMPACT OF DEMONETISATION ON FINANCIAL MARKET
IN INDIA:

Demonetisation has polarised the entire nation. This had also diverse impact on Indian
Financial Market. There was slow down in customers spending and economic growth. This
was due to decrease in cash spending power.
Demonetization is the act of eradicating a currency unit from circulation. Indian economy
witnessed this on 8 November 2017 when Prime Minister Narendra Modi announced that the
two highest denomination currency notes, that is, ₹500 and ₹1,000 ceased to be legal tender.
As most of the transactions in the country are based on cash only, the announcement resulted
into huge hue and cry nationwide. It was estimated that approximately 86 per cent of cash
was washed off from circulation. The currency notes that were rendered invalid were
replaced by the new currency notes of ₹500 and ₹2,000 later.
India is a highly diversified economy. Demonetisation has been applied in many developed
countries before but it haven’t been implemented in such a highly demo-graphically and
economically diversified country.
Demonetisation led to several changes for the financial sector which can be summarised
below:13
(a)Shift in currency demand: There has been a significant shift in the income elasticity of
currency demand in the post-demonetisation period to 0.9 from more than 1 in the pre-
demonetisation period, reflecting a reduction in cash intensity in retail transactions.

(b)Significant growth in bank deposits: The ‘excess’ low-cost bank deposit growth, a
mirror image of the decline in currency in circulation (CIC), following demonetisation has
been estimated in the range of 3.0-4.7 percentage points.

(c)Greater financial inclusion: Since demonetisation, 50 million new accounts were opened
under Pradhan Mantri Jan Dhan Yojana (PMJDY) by October 2017.

(d)Detection of suspicious transactions: The amount of unusual cash deposits in special

types of accounts (such as the Basic Saving Bank Deposit, PMJDY, Kisan Credit Card
(KCC), loan accounts and the like) is estimated in the range of `1.6-1.7 trillion.

(e) Improved monetary transmission: In an environment of a surge in low-cost current

account and saving account (CASA) deposits, banks announced a large cut in their marginal
cost of funds based lending rates (MCLR) with a 100 basis points (bps) reduction in the 1-
year MCLR.

(f)Increase in mutual fund investments by households: A sizeable expansion in the

collections of debt/income-oriented mutual funds occurred after demonetisation i.e., during
November 2016 to March 2017.

(g)Higher collections under life insurance schemes: The cumulative insurance premium
collections during November 2016 to January 2017 increased by 46 per cent over the same
period of the previous year.

13
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(h)Accelerated digitisation of retail payments: The latest data reveal that prepaid payment
instrument (PPI) volumes increased by 54 per cent between November 2016 and August
2017, as also mirrored in the significant drop in the income elasticity of currency demand
referred to earlier.

(i)Higher rate of detection of fake Indian currency notes (FICNs): In the post-
demonetisation period, the rate of detection of FICNs rose to 6 pieces and 12 pieces for `500
and `1000 notes, respectively, for every million pieces of notes processed – more than twice
during the pre-demonetisation period.

So, it could be said that the move has had a big impact on the stocks markets. A lot of
investors are withdrawing capital from stocks. Some because they were out of funds (since
the currency they had at home no longer works) and others because they expect a crash,
perhaps an opportunity to buy at lower levels.
CONCLUSION:

A financial market helps in raising capital and managing the monetary risks of an economy.

The global financial transactions of a nation can be easily cleared because of the existence of

financial markets. These markets have also encouraged and developed international trade

over the years. It has greatly contributed in bringing the economies close together and

reducing the trade barriers across the globe.

The Indian financial market is structured in a way to promote saving, investment and

resources utilisation. Finance ministry of India makes financial policies for the public. The

participants of the financial market implement those policies for the larger good of the public

and the economy as a whole. A robust and efficient financial market is not only good for the

home country only, but it also supports other economies of the world. The Indian financial

market has developed a lot over the past 60 years.

BIBILIOGRAPHY:

BOOKS REFERRED:

 M.Y. Khan, Indian Financial Market, MC Graw Hill Publication, 9th

edition.
 E. Gordon, “Financial Markets and Services”, Himalya Publishing House,
10th edition, 2016.
 Dr. S Gursamy, ‘Essentials of financial service’, 2nd edition 2015.

SITES:

 www.academiaedu.in
 www.researchgate.in
 www.scribd.in
 www.UKessays.in