INDIAN FINANCIAL SYSTEM

CIA

Hanna masoomeh Hussain

2220959
1bbads
Date of submission: 25-9-2022

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INDEX
 Introduction to financial markets
 Understanding the financial markets
 Types of financial markets
 Financial markets of America
 Financial market of Japan
 Financial market of India

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INTRODUCTION TO FINANCIAL MARKETS

Financial Markets include any place or system that provides buyers

and sellers the means to trade financial instruments, including
bonds, equities, the various international currencies, and derivatives.

Financial markets facilitate the interaction between those who need

capital with those who have capital to invest. In addition to making, it
possible to raise capital, financial markets allow participants to
transfer risk (generally through derivatives) and promote commerce.

 Financial markets refer broadly to any marketplace where the trading

of securities occurs.

 There are many kinds of financial markets, including (but not limited
to) forex, money, stock, and bond markets.

 These markets may include assets or securities that are either listed
on regulated exchanges or else trade over-the-counter (OTC).

 Financial markets trade in all types of securities and are critical to

the smooth operation of a capitalist society.

 When financial markets fail, economic disruption including recession

and unemployment can result.

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UNDERSTANDING THE FINANCIAL MARKETS

Financial markets play a vital role in facilitating the smooth operation

of capitalist economies by allocating resources and creating liquidity for
businesses and entrepreneurs.

The markets make it easy for buyers and sellers to trade their financial
holdings.

Financial markets create securities products that provide a return for

those who have excess funds (Investors/lenders) and make these funds
available to those who need additional money (borrowers).

The stock market is just one type of financial market. Financial markets
are made by buying and selling numerous types of financial instruments
including equities, bonds, currencies, and derivatives.

Financial markets rely heavily on informational transparency to ensure

that the markets set prices that are efficient and appropriate. The
market prices of securities may not be indicative of their intrinsic value
because of macroeconomic forces like taxes.

Some financial markets are small with little activity, and others, like
the New York Stock Exchange (NYSE) , trade trillions of dollars of
securities daily. The equities (stock) market is a financial market that
enables investors to buy and sell shares of publicly traded companies.

The primary stock market is where new issues of stocks, called initial

public offerings (IPOs), are sold. Any subsequent trading of stocks
occurs in the secondary market, where investors buy and sell securities
that they already own.

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TYPES OF FINANCIAL MARKETS
STOCK MARKETS

Perhaps the most ubiquitous of financial markets are stock markets. These
are venues where companies list their shares and they are bought and
sold by traders and investors. Stock markets, or equities markets, are used
by companies to raise capital via an initial public offering (IPO), with
shares subsequently traded among various buyers and sellers in what is
known as a secondary market.

OVER THE COUNTER MARKETS

An over-the-counter (OTC) market is a decentralized market—meaning it

does not have physical locations, and trading is conducted electronically—
in which market participants trade securities directly between two parties
without a broker. While OTC markets may handle trading in certain stocks
(e.g., smaller or riskier companies that do not meet the listing criteria of
exchanges), most stock trading is done via exchanges. Certain derivatives
markets, however, are exclusively OTC, and so they make up an important
segment of the financial markets. Broadly speaking, OTC markets and the
transactions that occur on them are far less regulated, less liquid, and
more opaque.

BOND MARKETS

A bond is a security in which an investor loans money for a defined period

at a pre-established interest rate. You may think of a bond as
an agreement between the lender and borrower that contains the details of
the loan and its payments. Bonds are issued by corporations as well as by
municipalities, states, and sovereign governments to finance projects and
operations. The bond market sells securities such as notes and bills issued
by the United States Treasury, for example. The bond market also is called
the debt, credit, or fixed-income market.

MONEY MARKETS

Typically the money markets trade in products with highly liquid short-term
maturities (of less than one year) and are characterized by a high degree
of safety and a relatively low return in interest. At the wholesale level, the
money markets involve large-volume trades between institutions and
traders. At the retail level, they include money market mutual funds bought
by individual investors and money market accounts opened by bank
customers.

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DERIVATIVES MARKETS

A derivative is a contract between two or more parties whose value is

based on an agreed-upon underlying financial asset (like a security) or set
of assets (like an index). Derivatives are secondary securities whose value
is solely derived from the value of the primary security that they are linked
to. In and of itself a derivative is worthless. Rather than trading stocks
directly, a derivatives market trades in futures and options contracts, and
other advanced financial products, that derive their value from underlying
instruments like bonds, commodities, currencies, interest rates, market
indexes, and stocks.

FOREX MARKETS

The forex (foreign exchange) market  is the market in which participants

can buy, sell, hedge, and speculate on the exchange rates
between currency pairs. The forex market is the most liquid market in the
world, as cash is the most liquid of assets. The currency market handles
more than $6.6 trillion in daily transactions, which is more than the futures
and equity markets combined.

COMMODITIES MARKETS

Commodities markets are venues where producers and consumers meet

to exchange physical commodities such as agricultural products (e.g.,
corn, livestock, soybeans), energy products (oil, gas, carbon credits),
precious metals (gold, silver, platinum), or "soft" commodities (such as
cotton, coffee, and sugar). These are known as spot commodity markets,
where physical goods are exchanged for money.

CRYPTOCURRENCY MARKETS

The past several years have seen the introduction and rise
of cryptocurrencies such as Bitcoin and Ethereum, decentralized digital
assets that are based on blockchain technology. Today, thousands of
cryptocurrency tokens are available and trade globally across a patchwork
of independent online crypto exchanges. These exchanges host digital
wallets for traders to swap one cryptocurrency for another, or for fiat
monies such as dollars or euros.

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FINANCIAL MARKET OF AMERICA
As by far the world’s largest economy by gross domestic product, the
United States is home to many of the world’s largest financial markets. For
example, the United States has by far the largest share of the world stock
markets, being home to over half the total value of global.

EQUITY MARKETS
U.S. equity markets represent 38.5% of the $105.8 trillion in global equity
market cap, or $40.7 trillion; this is 3.7x the next largest market, the EU.

Equity issuance in the U.S., including common and preferred shares,

totaled $390.0 billion in 2020, a 71.0% increase year-over-year. Initial
public offering (IPO) volume was $85.3 billion in 2020, up 74.7% from
$48.8 billion in 2019. Follow-on, or secondary, issuance totaled $258.5
billion in 2020, up 77.8% from 2019.

U.S. stock markets increased across the board in 2020: the Dow Jones
Industrial Average rose by 7.2%, the S&P 500 Index was up 16.3%, the
Nasdaq Composite Index increased by 43.6% and the Russell 2000 Index
gained 18.4%.

FIXED INCOME MARKETS

U.S. fixed income markets comprise 38.3% of the $123.5 trillion securities
outstanding across the globe, or $47.2 trillion; this is 1.9x the next largest
market, the EU.

Fixed income issuance totaled $12.2 trillion in 2020, up 48.1% from 2019.
The greatest issuance increase was in mortgage-backed securities,
+96.2% to $4.0 trillion, followed by corporate bonds at 60.4% to $2.3
trillion and Treasury securities at +32.7% to $3.9 trillion.

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INVESTOR PARTICIPATION, SAVINGS AND INCOME
Federal Reserve Board data showed the value of U.S. households’ liquid
assets increased by 16.7% to $58.5 trillion in 2020 from $50.2 trillion in
2019. Of total liquid assets held by U.S. households, 44.2% was in
equities, 23.4% in bank deposits and CDs and 19.2% in mutual funds.

According to the latest survey from the Federal Reserve, 53% of American
households own stocks, whether directly or indirectly.

The total value of U.S. retirement assets increased by 8.1% to $41.8 trillion
in 2020, according to Federal Reserve. Total private pension assets, both
defined benefit and defined contribution plans, rose 8.8% to $11.9 trillion
while assets held in individual retirement accounts (IRAs) increased by
12.5% to $12.2 trillion.

THE SECURITIES INDUSTRY

The number of FINRA-registered broker-dealers decreased by 2.3% to
3,435 in 2020.

National securities industry employment, as reported by the U.S.

Department of Labour, reached 975,600 jobs in 2020, an increase of 0.9%
year-over-year. The number of those jobs located in New York State and
New York City declined 3.1% and 3.3% respectively, to 197,200 and
177,200.

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THE U.S MONEY MARKET
The domestic money market in the United States carries out the largest
volume of transactions of any such market in the world; its participants
include the most heterogeneous group of financial and nonfinancial
concerns to be found in any money market; it permits trading in an
unusually wide variety of money substitutes; and it is less centralized
geographically than the money market of any other country.

Although there has always been a clustering of money market activities

in New York City and much of the country’s participation in the
international money market centres there, a process of continuous change
during the 20th century has produced a genuinely national money market.

MONEY MARKET INSTRUMENTS

Transactions in federal funds and clearinghouse funds are further
supplemented by transactions in which either kind of money is exchanged
for some other liquid, money market instrument, most frequently
government securities.

The magnitude of the market for government securities became so great

after World War II that it overshadowed all other elements of the money
market. Trading in outstanding “governments” is virtually all done through
dealers who buy and sell for their own account at prices which they quote
on request (standing ready to “bid” for or to “offer” any outstanding issue).

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Most of these dealers have head offices located in New York City, but all
are engaged in nationwide operations. Their transactions and the lending
arrangements through which they finance their own inventories of
government securities have evolved into a particularly sensitive indicator of
the pressures of supply and demand on the money market from day to
day.

The most common form of dealer financing is the repurchase agreement,

through which dealers sell parts of their inventory temporarily, subject to
repurchase.

FINANCIAL MARKET OF JAPAN

In the first decades after World War II, Japan’s complex financial system was
significantly different from that of other developed countries in several
respects, most notably in the major role played by banking and the
relatively minor position of securities. However, these differences gradually
disappeared as markets were deregulated and internationalized. By the
1980s the Japanese financial establishment had become a major
international force: Japan’s banks had come to dominate international
banking, while the Tokyo Stock Exchange emerged as one of the largest
securities markets in the world, in terms of capitalization. However, much
of this growth was based on speculation in the “bubble” economy of highly
inflated real estate values. The bursting of the bubble in the early 1990s
seriously affected both banking and the securities market into the early
21st century and precipitated a prolonged period of recovery. Meanwhile,
over a period of some two decades beginning in the mid-1980s, the laws
regulating the financial system gradually were revised, and the operation
of banks, securities, and insurance companies was liberalized.

BANKING
The Bank of Japan, established in 1882, is the sole bank that issues
the yen; it also plays an important role in determining and enforcing the
government’s economic and financial policies. Until the late 1990s the
bank was under the indirect control of the Ministry of Finance, but
legislation enacted at that time made it autonomous of the ministry. Also,
in the late 1990s a new Financial Supervisory Agency (since 2000 called

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the Financial Services Agency) was established to take over auditing and
supervisory operations formerly performed by the Ministry of Finance.

SECURITIES
TOKYO STOCK EXCHANGE
Japan’s capital market has become one of the pillars of the global 24-hour
securities market. There are several stock exchanges in Japan; the two
most important, Tokyo and Ōsaka, account for almost all the business.
Stock trading grew rapidly during the late 1980s, partly in response to a
stronger yen, declining interest rates, and the existence of a large amount
of capital for financial investment. However, at that time the market also
was highly speculative, and the advances were followed by a serious
decline.

MONEY MARKETS OF JAPAN

Japan today sits on the largest cache of wealth ever assembled. It has the
power to move markets anywhere in the world. Consider that.

The Tokyo Stock Exchange has now surpassed New York to become the
world’s largest on the basis of market capitalization. Osaka has bumped
London to fourth place.

Of the world’s ten largest banks, nine are Japanese. If deposit size is the
unit of measurement, no U.S. bank makes it into the top 25.

Japanese investors’ appetite is the key determinant of the price of U.S.

Treasury bonds.

Japanese and Japanese-owned banks now supply more than 20% of all
credit in the state of California.

The market value of Japan, as measured by an extrapolation of real estate

prices, exceeds that of the United States.1 The market value of the
Imperial Palace grounds in central Tokyo is said to exceed that of a
number of entire U.S. states.

Japanese households save an average of 17% to 19% of their annual

income; American households save less than 5%.

Bankers have an especially keen appreciation for the scope of Japanese

financial dominance. Most realize that:

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Nomura Securities has enough capital to buy up all the leading Wall Street
companies.

The Japanese Postal Savings System, which does not show up on a list of
Japanese banks but is in effect a huge government-owned bank, has
assets of close to a trillion dollars, making it larger than the top 12 U.S.
banks combined.

Not only has Japan amassed the world’s largest fortune, but that wealth is
concentrated, to an unprecedented extent, in a few institutions. The United
States has over 14,000 commercial banks; Japan has 158. The United
States has more than 1,550 life insurance companies, while Japan has 24,
and some 1,775 property and casualty companies to Japan’s 23. Four
securities companies in Japan account for over 60% of all stock trades.
That concentration makes Japan’s accumulated surpluses loom all the
greater.
FINANCIAL MARKET IN INDIA

India has an assorted monetary area that is quickly extending, both as far
as laid out monetary administrations firms’ vigorous development and new
contestants into the market. Business banks, protection firms, non-banking
monetary organisations, co-agents, annuity reserves, shared assets, and
other more modest monetary establishments make up the area.

New organizations, for example, instalment banks, have recently been

permitted to be laid out by the financial controller, extending the kinds of
elements that work in the business.

Nonetheless, India’s monetary area is principally a financial area, with

business banks representing over 64% of the monetary framework’s all-out
resources. 

In India, there exists broadly two types of Financial Markets which are

further classified:

Money Market is a market that deals with short-term funds. The capital

market is a market that deals with long-sighted funds. Lenders and
borrowers can trade funds through the financial system. In the areas of
insurance, banking, capital markets, and numerous services, India’s
financial system is governed by independent authorities.

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What are the Types of Financial Markets in
India?

Markets for Bonds

A bond is a financial instrument whereby an investor lends money for a set
length of time at a fixed interest rate. A bond can be thought of as a
contract between the creditor and debtor that describes the debt and its
instalments. Bonds are issued to fund projects and operations by firms,
communities, regions, and sovereign nations. The bond market, for
example, sells assets issued by the US Treasury, including such notes and
bills. Bonds are sometimes known as debit, credits, or fixed-income
securities.

Markets for Money

Money markets typically trade in liquidity short-term bonds (less than 12
months ) and are characterized by a high level of safety and a low rate of
interest return. Money markets feature large-volume trading between
organizations and dealers at the wholesale level. It consists of money
market mutual funds purchased by private investment and money market
opened by account holders at the retail level. Individuals can participate in
the money markets by purchasing short-term certificates of deposit (CDs),
municipal bonds, or US Treasury bills, among other options.

Stock Exchange
The stock market is where you can buy and sell shares in public
corporations. Each share has a value, and investors profit from the stocks
if they outperform the market. Purchasing stocks is simple. The main issue
is determining which stocks will generate profit for the investor.

Derivatives Markets
A subordinate is a contract between at least two parties whose value is
determined by a concealed monetary resource (such as a security) or
collection of resources (like a list). Subordinates are optional protections
whose value is solely determined by the value of the essential security to
which they are linked. All by itself, a subsidiary is useless. Rather than

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exchanging stocks straightforwardly, a subsidiaries market exchanges
prospects and choices contracts, and other progressed monetary items,
that get their worth from fundamental instruments like securities, products,
monetary forms, loan fees, market files, and stocks.

What are Financial Instruments in India ? 

Cash instruments and derivative instruments are two types of financial
instruments.
Instruments of Cash
The value of cash instruments is established directly by the marketplace.
Securities, which are easily transferable, as well as loans and deposits,
where both the borrower and the lender must agree on a transfer.
Instruments that are derivatives
Derivative instruments are assets, indexes, and interest rates that derive
their worth from the value and attributes of one or more underlying entities.
Exchange-traded derivatives (ETDs) and over-the-counter (OTC)
derivatives are two types of derivatives.
Some examples of Financial Instruments in
India are:
Money Market Funds (also known as liquid funds) 
Bank Fixed Deposit (Bank FDs)
Post Office Savings Schemes (POSS) 
Public Provident Fund (PPF) 
Company Fixed Deposits (FDs) 
Bonds and Debentures
Mutual Funds

MONEY MARKET IN INDIA

The Money market in India is a correlation for short-term funds with
maturity ranging from overnight to one year in India including financial
instruments that are deemed to be close substitutes of money.[1] Similar
to developed economies the Indian money market is diversified and has
evolved through many stages, from the conventional platform of treasury
bills and call money to commercial paper, certificates of deposit, repos, forward
rate agreements and most recently interest rate swaps[2]

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The Indian money market consists of diverse sub-markets, each dealing in
a particular type of short-term credit. The money market fulfills the
borrowing and investment requirements of providers and users of short-
term funds, and balances the demand for and supply of short-term funds
by providing an equilibrium mechanism. It also serves as a focal point for
the central bank's intervention in the market.
Call money market
Call money market deals in short term finance repayable on demand, with
a maturity period varying from one day to 14 days. S.K. Niranjan
commented that call loans in India are provided to the bill market, rendered
between banks, and given for the purpose of dealing in the bullion market
and stock exchanges.[3] Commercial banks, both Indian and foreign, co-
operative banks, Discount and Finance House of India Ltd.(DFHI),
Securities trading corporation of India (STCI) participate as both lenders
and borrowers and Life Insurance Corporation of India (LIC), Unit Trust of
India(UTI), National Bank for Agriculture and Rural
Development (NABARD)can participate only as lenders. The interest rate
paid on call money loans, known as the call rate, is highly volatile. It is the
most sensitive section of the money market and the changes in the
demand for and supply of call loans are promptly reflected in call rates.
There are now two call rates in India: the Interbank call rate and the
lending rate of DFHI. The ceilings on the call rate and inter-bank term
money rate were dropped, with effect from May 1, 1989. The Indian call
money market has been transformed into a pure inter-bank market during
2006–07.[4] The major call money markets are
in Mumbai, Kolkata, Delhi, Chennai, Ahmedabad.
Treasury bill market
Treasury bills are an instrument of short-term borrowing by
the Government of India, issued as promissory notes under discount. The
interest received on them is the discount, which is the difference between
the price at which they are issued and their redemption value. They have
assured yield and negligible risk of default. Under one classification,
treasury bills are categorised as ad hoc, tap and auction bills. Under
another one, it is classified on the maturity period like 91-days TBs, 182-
days TBs, 364-days TBs and also 10-days TBs which has two types. In
recent times (2002–03, 2003–04), the Reserve Bank of India has been
issuing only 91-day and 364-day treasury bills. The auction format of the

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91-day treasury bill has changed from uniform price to multiple price to
encourage more responsible bidding from the market players.[5] The bills
are of two kinds- Adhoc and regular. The adhoc bills are issued for
investment by the state governments, semi-government departments and
foreign central banks for temporary investment. They are not sold to banks
and the general public. The treasury bills sold to the public and banks are
called regular treasury bills. They are freely marketable and commercial
banks buy entire quantities of such bills, issued on the tender. They are
bought and sold on a discount basis. Ad-hoc bills were abolished in April
1997.

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