Organized Sector of Indian Financial System

It comprises capital markets, money market, and foreign exchange market.

Capital market:- The capital market consists of all those connected with issuing and trading in equity shares and medium and long term debt instruments, which are bonds and debentures. The capital market is the most dynamic and the largest segment of the financial system.

Both equity and debt markets have two segments, primary and secondary. Primary market deals with issue of new equity and debt instruments and secondary market deals with subsequent buying and selling of these instruments. Secondary market is very important as it gives exit option to the investor. The capital markets operations are regulated by SEBI (Securities and Exchange Board of India). It regulates all participants in the market issuers, investment bankers who manages the issue, collecting bankers, brokers who facilitate trading of instruments in secondary market, investors and sellers of instruments, stock exchanges, clearing corporations and depositories.

Money market:- In money market short term funds are borrowed and lent. Government, banks, PSUs, private companies and quasi-government body are leading money market institutions. Largest volume of debt instruments are traded by Government of India and then banks. Banks play three important roles in money market. These are:

--- as borrowers of funds

--- as fund raisers

--- as dealers.

Banks borrow to fund their loan portfolio and to satisfy reserve requirements. Banks offer short-term, chiefly overnight loans immediately.

Banks also borrow funds from money market for longer periods by issuing CDs (Certificates of deposits). Its period ranges from 1 to 6 months. Banks raise funds through RPs (Repurchase Agreements). An RP is the sale of securities with the simultaneous agreement by the seller to repurchase them at later date. This agreement is a short-term collateralized loan.

Foreign exchange market: The inward remittances on account of exports and remittances from Indians working abroad result in flow of foreign currency into the country. The foreign funds accumulate in Indian bank’s Nostro accounts with their correspondent foreign banks outside India and also pay out equivalent Indian rupees to the beneficiaries in India.

Inward foreign funds increase money in circulation. Banks, which have surplus foreign currency funds, sell it to other Indian banks in exchange of Indian rupees. Surplus foreign funds with abnks are sold to RBI. Balances in the foreign currency accounts of RBI become the foreign exchange reserve of the country. An increase or decrease in forex impacts the financial system through increase or decrease in money supply.

Foreign entities invest in Indian business entities are called FDI (Foreign Direct Investment), and FII (Foreign Institutional Investors). These flow are large in magnitude and have a great impact on the Indian capital market and exchange rate.