Financial Markets: An

Introduction
Vivek Sharma
 Key Coverage
An Overview of Financial Markets

Role of Financial Markets

Equity Market

Money and Debt Market

Derivatives Market

Foreign Currency Market

Commodity Market
 Viksit Bharat@2047
• Viksit Bharat@2047 envisions India as a developed nation by 2047, the centenary of our
independence.
• This would entail sustained economic growth of close to 8 per cent every year for at least a
decade.
• To achieve this growth, the investment rate must rise to approximately
35 per cent of GDP, up from the current 31 per cent.
• Additionally, it will be essential to develop the manufacturing sector further and invest in
emerging technologies such as AI, robotics, and biotechnology.
• India will also need to create 78.5 lakh new non-farm jobs annually till 2030,32 achieve 100
per cent literacy, develop the quality of our education institutions, and develop high-quality,
future-ready infrastructure at scale and speed.
 Key Lessons
Growth of an economy is linked to its finance
sector.

Savings are channelized into investments by

financial sector.

An active and vibrant financial sector is a pre-

requisite for growth of our economy
 The Indian Financial Markets: Key Features
• The function of the financial markets is to ensure that economic activity is
enabled by providing access of funds to those that need it for consumption or
productive activity.
• They provide a way for aggregation of funds from a large number of investors
and make it available for productive economic activity.
• Providing liquidity and exit options are an important function of financial
markets.
• The financial market comprises money markets that deal with the short-term
lending and borrowing of funds and the securities or capital markets that enable
longer term transfer of funds using debt and equity instruments..
 The Indian Financial Markets: Key Features

• The allocation and re-allocation of resources may happen in the primary markets
where securities are issued by the borrowing institutions directly to the lenders
or investors or in the secondary markets which provides investors the options to
exit or reallocate their resources by dealing amongst themselves.
• The activities in the financial markets are facilitated by the market participants
such as banks, financial institutions, brokers and dealers, custodians,
depositories and depository participants, among others. Institutions such as
mutual funds, insurance companies and pension funds are large and informed
investors who provide funds in the markets and provide liquidity and stability.
 Financial Market
The financial market comprises
• money markets that deal with the short-term lending and borrowing of
funds and
• the securities or capital markets that enable longer term transfer of funds
using debt and equity instruments.
 Some Key Questions

Innovation and Financial Markets

Regulations and Financial Markets

Intermediation versus Disintermediation

 Regulation versus Growth
• Can a developing economy (nations to the left
of the peak of the bell curve) reach a point of
over-finance such that advancements to the
financial sector hamper its growth prospects?
• In the presence of weak institutions and poor
regulatory quality, it is possible for an
emerging economy to reach well past its
optimal level of financial development.
• Thus, the upper bound to financial
development is fixed by the regulatory quality
of the emerging market.
 Regulation versus Growth
• As the regulatory quality in the financial sector improves, regulators will need to
play a delicate balancing act between the goals of financial resilience and
growth.
• On the one hand, building financial resilience would entail higher capital buffers,
stricter regulations and reduced risk-taking.
• On the other hand, this would lead to lower financial growth by limiting
profitable investments and innovation. For instance, a system where banks
maintain high reserve ratios and only lend to the most creditworthy borrowers
may exclude smaller households and businesses from accessing credit.
 Equity Market
Capital Formation – The stock market enables companies to raise capital by issuing shares, which helps in
business expansion, innovation, and job creation.
Wealth Creation – It provides individuals and institutions an opportunity to invest in companies and grow
their wealth over time through capital appreciation and dividends.
Liquidity Provision – Investors can buy and sell shares easily, ensuring liquidity, which makes the market
attractive for investors and businesses.
Price Discovery – The stock market reflects real-time valuations of companies based on supply and
demand, financial performance, and market conditions.
Risk Diversification – Investors can spread their investments across various sectors and asset classes,
reducing the risk of loss.
Corporate Governance & Efficiency – Publicly traded companies are subject to regulatory oversight,
financial disclosures, and shareholder scrutiny, which promotes transparency and efficiency.
Background- Changing Landscape of
Securities Market
 Debt Market
Capital Mobilization – Facilitates fundraising for governments, corporations, and financial institutions to
support infrastructure, business expansion, and other projects.
Liquidity Provision – Ensures that investors can easily buy and sell debt instruments, making the market
more accessible and efficient.
Price Discovery – Determines fair market values of debt securities based on supply, demand, credit risk,
and prevailing interest rates.
Risk Management – Allows investors and issuers to hedge against risks like interest rate fluctuations, credit
risk, and inflation.
Benchmark for Interest Rates – Helps establish reference rates (e.g., government bond yields) that
influence borrowing costs across the economy.
Efficient Capital Allocation – Channels savings into productive investments, ensuring optimal distribution of
financial resources in the economy.
Corporate Debt Market and
Disintermediation
 Debt Market: Some Key Issues
1) In contrast to the equity market, the debt market in India remains undercapitalised. As a percentage of GDP, the
corporate bond market is only 18 per cent in India, as opposed to 80 per cent in Korea and 36 per cent in China. The
market for corporate bonds comprises high-end bonds, with 97 per cent of corporate bond issuances concentrated
in the top 3 rating categories (AAA, AA+ and AA). Issuers who are unable to get these ratings are unable to access
the bond market.
2)
2) An overwhelming majority of corporate bond issuance happens through the route of private placement, which
actively deters the participation of retail investors. In FY24, the public placement of corporate bonds stood at
₹19,000 crore against the private placement of around ₹8,38,000 crore.
3) Insurance and pension funds cannot be invested in bonds that are lower than AA-rated. This effectively crowds
out small players in the corporate bond market. Liquidity is also bottled through regulations that prevent provident
funds from investing in corporate bonds for more than 3 years. Moreover, insurance funds are not allowed to invest
in debt issued by private companies.
 Derivatives Market in India

Equity Derivatives

Fixed Income Derivatives

Currency Derivatives

Commodity Derivatives
Equity Derivatives Market
Fixed Income Derivatives in India
 Currency Market

Facilitating International Trade

Enabling Currency Exchange

Hedging and Risk Management

Price Discovery
 Foreign Currency Market

Spot

Forward

Futures and Options

Swaps
 Commodity Market in India
The commodity market in India is a marketplace for buying, selling, and
trading various commodities, including agriculture, metals, energy, and
bullion. It plays a crucial role in India's economy by providing a platform for
price discovery and risk management.
 Key Features of Commodity Market
• Futures Trading – Investors can trade commodity derivatives to hedge
risks.
• Regulated by SEBI – Ensures transparency and fair trading.
• Helps in Price Discovery – Reflects global and domestic demand-supply
conditions.
• Provides Risk Management – Farmers and businesses hedge against price
fluctuations.
 Need of Insurance Industry
• Financial Security & Risk Mitigation – Insurance protects individuals, businesses, and governments from
unforeseen financial losses due to accidents, health emergencies, natural disasters, or business disruptions.
• Encourages Long-term Savings & Investments – Life insurance and pension plans encourage savings,
ensuring financial security for individuals post-retirement while also providing capital for long-term
investments.
• Boosts Economic Growth – A strong insurance sector mobilizes savings, provides capital for infrastructure
development, and supports various industries, contributing to national economic stability.
• Promotes Financial Inclusion – Affordable and accessible insurance products help low-income groups
manage risks, reducing poverty and dependence on government welfare programs.
• Enhances Business & Trade Stability – Businesses rely on insurance (e.g., liability, property, and marine
insurance) to mitigate risks, ensuring stability and fostering entrepreneurship and trade growth.
Thank You