Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Bachelor of Commerce
Financial Markets
Semester V
(2014-15)
Submitted by
Yash Hiranandani
Roll No. 13
1
H.R. COLLEGE OF COMMERCE & ECONOMICS
Yash Hiranandani
Bachelor of Commerce
Financial Markets
In Partial Fulfillment of the requirements
Semester V
For the Award of Degree of Bachelor of
Roll No - 13
H.R. COLLEGE OF COMMERCE & ECONOMICS
2
H.R COLLEGE OF COMMERCE AND
ECONOMICS
123, D.W. Road, Churchgate, Mumbai – 400020
CERTIFICATE
Principal
Project Guide
Yash Hiranandani
Roll No. 13
4
INDEX
1 Introduction 8
2 Money and Capital Market 10
3 Development of 26
Indian Financial
Market
4 Problems and 73
Solutions
5
Executive Summary
Financial Markets are the heart and soul of any nations economy. The
economic health of a country is dependant on the performance of these
financial markets such as Equities Markets, Commodities Markets, Forex
Markets etc. These markets have existed since as far as back as the
1800’s. Investors trade on these markets and the markets are influenced
by these activities. In this project I have focused on the progress these
markets have made over the years, especially in recent times. I have
focused on mainly on the following markets:
6
This project also compares these markets in the past and focuses on the
changes made over the years in these markets and how these improvements
have bettered the numbers and efficiency of the financial sector in India.
7
Introduction
What does the India Financial market comprise of? It 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.
8
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.
The Indian Financial Markets can be divided into the CapitalMarket and
the Money Market as shown in the diagram below
9
MEANING OF MONEY MARKET:-
A money market is a market for borrowing and lending of short-
term funds. It deals in funds and financial instruments having a maturity
period of one day to one year. It is a mechanism through which short-
term funds are loaned or borrowed and through which a large part of
financial transactions of a particular country or of the world are cleared.
It is different from stock market. It is not a single market but a
collection of markets for several instruments like call money market,
Commercial bill market etc. The Reserve Bank of India is the most
important constituent of Indian money market. Thus RBI describes
money market as “the centre for dealings, mainly of a short-term
character, in monetary assets, it meets the short-term requirements of
borrowers and provides liquidity or cash to lenders”.
10
FUNCTIONS OF MONEY MARKET :-
1) It caters to the short-term financial needs of the economy.
2) It helps the RBI in effective implementation of monetary policy.
3) It provides mechanism to achieve equilibrium between demand and
supply of short-term
funds.
4) It helps in allocation of short term funds through inter-bank transactions
and money market
Instruments.
5) It also provides funds in non-inflationary way to the government to meet
its deficits.
6) It facilitates economic development.
3) Commercial Bills :-
13
They are freely transferable but only after the lock-in-period of 45 days
after the date of issue.
In India the size of CDs market is quite small.
In 1992, RBI allowed four financial institutions ICICI, IDBI, IFCI
and IRBI to issue CDs with a maturity period of. one year to three years.
14
7) The Repo Market ;-
15
Unorganised Sector Of Money Market :-
The economy on one hand performs through organised sector and on
other hand in rural areas there is continuance of unorganised, informal
and indigenous sector. The unorganised money market mostly finances
short-term financial needs of farmers and small businessmen. The main
constituents of unorganised money market are:-
16
3) Non - Banking Financial Companies (NBFCs)
They consist of :-
1. Chit Funds
2. Nidhis :-
Loan companies are found in all parts of the country. Their total
capital consists of borrowings, deposits and owned funds. They give
loans to retailers, wholesalers, artisans and self employed persons. They
offer a high rate of interest along with other incentives to attract
deposits. They charge high rate of interest varying from 36% to 48% p.a.
17
4. Finance Brokers
They are found in all major urban markets specially in cloth, grain
and commodity markets. They act as middlemen between lenders and
borrowers. They charge commission for their services.
18
FEATURES AND DEFICIENCIES OF INDIAN MONEY
MARKET
1. Dichotomy:-
19
3. Diversity In Interest Rates :-
5. Shortage Of Funds :-
In Indian Money Market demand for funds exceeds the supply. There
is shortage of funds in Indian Money Market an account of various factors
like inadequate banking facilities, low savings, lack of banking habits,
existence of parallel economy etc. There is also vast amount of black
money in the country which have caused shortage of funds. However, in
20
recent years development of banking has improved the mobilisation of
funds to some extent.
Though the commercial banks, have been opened on a large scale, yet
banking facilities are inadequate in our country. The rural areas are not
covered due to poverty. Their savings are very small and mobilisation of
small savings is difficult. The involvement of banking system in different
scams and the failure of RBI to prevent these abuses of banking system
shows that Indian banking system is not yet a well organised sector.
CAPITAL MARKET
21
Capital market is a market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc. The buying/selling is
undertaken by participants such as individuals and institutions.
Capital market in any country consists of equity and the debt markets.
Within the debt market there are govt securities and the corporate bond
market. For developing countries, a liquid corporate bond market can
play a critical role in supporting economic development as
22
Despite rapidly transforming financial sector and a fast growing
economy India's corporate bond market remains underdeveloped. It is
still dominated by the plain vanilla bank loans and govt securities. The
dominance of equities and banking system can be gauged from the fact
that since 1996, India's stock market capitalisation as a percentage of
GDP has increased to 108% from 32.1%, while the banking sector's ratio
to GDP has risen from 46.3% to 78.2% in 2008. In contrast, the bond
markets grew to a modest 43.4 percent of GDP from 21.3 percent. Of this
corporate bonds account for around 3.2% of GDP and government bond
market accounts for 38.3% of GDP.
23
Over time great innovations have been witnessed in the corporate bond
issuances, like floating rate instruments, convertible bonds, callable
(put-able) bonds, zero coupon bonds and step-redemption bonds. This
has brought a variety that caters to a wider customer base and helps
them maintain strike a risk-return balance.
In India while private placement grew 6.23 times to Rs. 62461.80 crores
in 2000-01 since 1995-96, the corresponding increase in public issues of
debt has been merely 40.95 percent from the 1995-96 levels.This leads to
a crunch in market liquidity. A number of factors are responsible for
such preference. First, the companies can avoid the lengthy issuance
procedure for public issues. Second is the low cost of private placement.
Third, the amounts that can be raised through private placements are
typically larger. Fourth, the structure of debt can be negotiated according
to the needs of the issuer. Finally, a corporate can expect to raise debt
from the market at finer rates than the PLR of banks and financial
institutions only with an AAA rated paper. This limits the number of
entities that would find it profitable to enter the market directly. Even
though the listing of privately placed bonds has been made mandatory, a
proper screening mechanism is missing to take care of the quality and
transparency issues of private placement deals.
24
Dominance of financial institutions:
The public issues market has over the years been dominated by financial
institutions. The issuers who are the main participants in other
corporate bond markets (that is, private sector, non-financial), represent
only a small proportion of the corporate debt issues in the Indian
market. Most of the privately placed bonds (which are about 90% of the
total issue of corporate bonds) are issued by the financial and the public
sector.
The listed corporate bonds also trade on the Wholesale Debt Segment of
NSE. But the percentage of the bonds trading on the exchange is small.
Number of trades in debt compared to equity on average for August
2007 is just 0.003%.
25
DEVELOPMENT OF INDIAN FINANCIAL
MARKETS
As all the Financial Markets in India together form the Indian Financial
Markets, all the Financial Markets of Asia together form the Asian
Financial Markets; likewise all the Financial Markets of all the countries
of the world together form the Global Financial Markets. Financial
Markets deal with trading (buying and selling) of financial securities
(stocks and bonds), commodities (valuable metals or food grains), and
other exchangeable and valuable items at minimum transaction costs
and market efficient prices. Financial Markets can be domestic or
international. The Global Financial Markets work as a significant
instrument for improved liquidity.
Financial Markets can be categorized into six types:
Capital Markets: Stock markets and Bond markets
Commodity Markets
Money Markets
Derivatives Markets: Futures Markets
Insurance Markets
Foreign Exchange Markets
26
In recognition of the critical role of the financial markets, the initiation
of the structural reforms in the early 1990s in India also encompassed a
process of phased and coordinated deregulation and
liberalisation of financial markets. Financial markets in India in the
period before the early 1990s were marked by administered interest
rates, quantitative ceilings, statutory pre-emptions, captive market for
government securities, excessive reliance on central bank financing,
pegged exchange rate, and current and capital account restrictions. As a
result of various reforms, the financial markets have transited to a
regime characterised by market-determined interest and exchange rates,
price-based instruments of monetary policy, current account
convertibility, phased capital account liberalisation and an auction-based
system in the government securities market.
27
Money market
28
In line with the objective of widening and deepening of the money
market and imparting greater liquidity to the market for facilitating
efficient price discovery, new instruments, such as collateralised lending
and borrowing obligations (CBLO), have been introduced. Money market
instruments such as market repo and CBLO have provided avenues for
non-banks to manage their short-term liquidity mismatches and
facilitated the transformation of the call money market into a pure inter-
bank market.
After the adoption of the full-fledged LAF in June 2000, call rates, in
general, witnessed a declining trend up to 2004-05. The institution of
29
LAF has also enabled the Reserve Bank to manage liquidity more
efficiently and reduce volatility in call rates. Volatility, measured by the
coefficient of variation (CV) of call rates, has declined significantly in the
current decade as compared with that in the 1990s, with some increase
in 2006-07, as already noted. BIS Review 51/2007. The reduction in bid-
ask spread in the overnight rates indicates that the Indian money market
has become reasonably deep, vibrant and liquid. During April
2004−February 2007, the bid-ask spread has varied within a range of -
0.37 to +1.32 basis points with an average of 16 basis points and
standard deviation (SD) of 11 basis points (coefficient of variation being
68.8). Despite a higher degree of variation, however, the bid-ask spread
remained within the 2-SD band around the average during most of the
period.
31
Since May 2011, the liquidity conditions can be broadly divided into
three distinct phases.
After generally remaining within the Reserve Bank’s comfort zone during
the first phase during May–October 2011, the liquidity deficit crossed the
one per cent of NDTL level during November 2011 to June 2012. This
large liquidity deficit was mainly caused by forex intervention and
increased divergence between credit and deposit growth. The deficit
conditions were further aggravated by frictional factors like the build-up
of government cash balances with the Reserve Bank that persisted longer
than anticipated and the increase in currency in circulation. Accordingly,
the Reserve Bank had to actively manage liquidity through injection of
liquidity by way of open market operations (OMOs) and cut in cash
reserve ratio (CRR) of banks. This was supported by decline in currency
in circulation and a reduction in government cash balances with the
Reserve Bank. As a result, there was a significant easing of liquidity
conditions since July 2012 with the extent of the deficit broadly
returning to the Reserve Bank’s comfort level of one per cent of NDTL.
Second, the repo rate and weighted call rate are far more closely aligned
under the new operating procedure than earlier; implying improved
transmission of monetary policy in terms of movement in call money
market interest rate
Third, the call money rate in turn is observed to be better aligned with
other money market interest rates after the implementation of new
operating procedure than before
32
As a result of various reform measures, the money market in India has
undergone significant transformation in terms of volume, number of
instruments and participants and development of risk management
practices. In line with the shifts in policy emphasis, various segments of
the money market have acquired greater depth and liquidity. The price
discovery process has also improved. The call money market has been
transformed into a pure inter-bank market, while other money market
instruments such as market repo and CBLO have developed to provide
avenues to non-banks for managing their short-term liquidity
mismatches. The money market has also become more efficient as is
reflected in the narrowing of the bid-ask spread in overnight rates. The
abolition of ad hoc Treasury Bills and introduction of Treasury Bills
auction have led to the emergence of a risk free rate, which acts as a
benchmark for the pricing of other money market instruments.
33
Major Developments in Money Market since the 1990s
34
Government securities and Capital market
35
were also employed during uncertain market conditions and while
issuing new instruments. Second, as the captive investor base was
viewed as constraining the development of the market, the statutory
prescription for banks’ investments in government and other approved
securities was scaled down from the peak level in February 1992 to the
statutory minimum level of 25 per cent by April 1997. As a result, the
focus shifted towards the widening of the investor base. A network of
intermediaries in the form of primary dealers was developed for this
purpose. Retail participation has been promoted in the primary market
(through a system of non-competitive bidding in the auctions) as well as
in the secondary market (by allowing retail trading in stock exchanges).
Simultaneously, the Reserve Bank also introduced new instruments with
innovative features to cater to perse market preferences, although the
experience in this regard has not been encouraging. Third, with the
discontinuance of the process of unconstrained recourse by the
Government to the Reserve Bank through automatic monetisation of
deficit and conversion of non-marketable securities to marketable
securities, the Reserve Bank gained more operational freedom. Fourth,
in an effort to increase liquidity, the Reserve Bank has, since the late
1990s, pursued a strategy of passive consolidation of debt by raising
progressively higher share of market borrowings through re-issuances.
This has resulted in critical mass in key maturities, and is facilitating the
emergence of market benchmarks. Fifth, improvement in overall
macroeconomic and monetary management that has resulted in lower
inflation, lower inflation expectations, and price stability has enabled the
elongation of the yield curve to maturities upto 30 years. Finally, the
Reserve Bank has also undertaken measures to strengthen the
technological infrastructure for trading and settlement. A screen-based
anonymous trading and reporting platform has been introduced in the
36
form of NDS-OM, which enables electronic bidding in primary auctions
and disseminates trading information with a minimum time lag.
One of the key issues in the development of the market for a better price
discovery is liquidity of securities. It was observed that, of the universe of
a large number of outstanding securities, only a few securities are
actively traded in the secondary market. The Reserve Bank has been
following a policy of passive consolidation through re-issuance of
37
existing securities with a view to enhancing liquidity in the secondary
segment of the government securities market. The share of re-issuances
in the total securities issued was 97.7 per cent during 2005-06. Active
consolidation of government securities has also been attempted under
the debt buyback scheme introduced in July 2003, which is expected to
be more actively pursued now. As a result of the developmental
measures undertaken, the volume of transactions has increased manifold
over the past decade.
To keep the markets liquid and active even during the bearish times, and
more importantly, to give the participants a tool to better manage their
interest rate risk, intra-day short selling in government securities was
permitted among eligible participants, viz., scheduled commercial banks
(SCBs) and primary dealers (PDs) in February 2006. Subsequently, the
short positions were permitted to be carried beyond intra-day for a
period of five trading days, effective January 31, 2007. To further
improve the liquidity in the government securities market, guidelines for
trading in when issued “WI” market were issued by the Reserve Bank in
May, 2006. Trading in “WI” segment, which commenced in August
2006, was initially permitted in reissued securities. It takes place from
the date of announcement of auction till one day prior to allotment of
auctioned securities. The revised guidelines extending “WI” trading to
new issuances of Central Government securities on a selective basis were
issued in November 2006.
38
markets are more popular and far developed than the debt markets. The
Indian debt market is composed of government bonds and corporate
bonds. However, the government bonds are
predominant (constituting 92% of the volume) and they form the liquid
component of the bond market. An active corporate bond market is
essential for India Inc. The corporate bond market is still at the nascent
stage. Although we have the largest number of listed companies on the
capital market, the share of corporate bonds in GDP is merely 3.3%,
compared to 10.6% in China 41.7% in Japan, 49.3% in Korea among
others. Further, close to 80% of corporate bonds comprises privately
placed debt of public financial institutions. The secondary market,
therefore, has not developed commensurately. Though there has been an
increase in the volumes, the trading activity is still negligible in the
secondary markets. If we look at the ratio of secondary market volume to
primary market volume, the ratio is below 1 indicating very low trading
activity in the secondary market.
Over the past few years, some significant reforms have been undertaken
to develop the bond market and particularly the corporate bond market.
The listing requirements for corporate debt have been simplified. Issuers
now need to obtain rating from only one credit rating agency unlike
earlier. Further, they are permitted to structure debt instruments, and
are allowed to do a public issue of below investment grade bonds. One
more welcome change was, the exemption of TDS on corporate debt
instruments issued in demat form and on recognized stock
exchanges.Data released by SEBI indicates that companies raised Rs 2.12
lakh crore through corporate bonds in 2009-10, up 22.71% from Rs 1.73
lakh crore in 2008-09. India has witnessed a boost in trading in the
recent past. Total trading in corporate bonds more than doubled from an
39
average of Rs. 1,550 crore in October 2009 to Rs 3,356 crore in March
2010, as reported by the National Stock Exchange and the Bombay Stock
Exchange
40
Foreign exchange market
Traditionally Indian forex market has been a highly regulated one. Till
about 1992-93, government exercised absolute control on the exchange
rate, export-import policy, FDI ( Foreign Direct Investment) policy. The
Foreign Exchange Regulation Act(FERA)enacted in 1973, strictly
41
controlled any activities in any remote way related to foreign exchange.
FERA was introduced during 1973, when foreign exchange was a scarce
commodity. Post independence, union government’s socialistic way of
managing business and the license raj made the Indian companies
noncompetitive in the international market, leading to decline in export.
Simultaneously India import bill because of capital goods, crude oil
&petrol products increased the forex outgo leading to sever scarcity of
foreign exchange. FERA was enacted so that all forex earnings by
companies and residents have to reported and surrendered (immediately
after receiving) to RBI (Reserve Bank of India) at a rate which was
mandated by RBI. FERA was given the real power by making “any
violation of FERA was a criminal offense liable to imprisonment”. It a
professed a policy of “a person is guilty of forex violations unless he
proves that he has not violated any norms of FERA”. To sum up, FERA
prescribed a policy – “nothing (forex transactions) is permitted unless
specifically mentioned in the act”. Post liberalization, the Government of
India, felt the necessity to liberalize the foreign exchange policy. Hence,
Foreign Exchange Management Act (FEMA) 2000 was introduced.
FEMA expanded the list of activities in which a person/company can
undertake forex transactions. Through FEMA, government liberalized
the export-import policy, limits of FDI (Foreign Direct Investment) & FII
(Foreign Institutional Investors) investments and repatriations, cross-
border M&A and fund raising activities. Prior to 1992, Government of
India strictly controlled the exchange rate. After 1992, Government of
India slowly started relaxing the control and exchange rate became more
and more market determined. Foreign Exchange Dealer’s association of
India (FEDAI), set up in 1958, helped the government of India in
framing rules and regulation to conduct forex exchange trading and
developing forex market In India.
42
The Indian foreign exchange market has witnessed far reaching changes
since the early 1990s following the phased transition from a pegged
exchange rate regime to a market determined exchange rate regime in
1993 and the subsequent adoption of current account convertibility in
1994 and substantial liberalisation of capital account transactions
(Annex III). Market participants have also been provided with greater
flexibility to undertake foreign exchange operations and manage their
risks. This has been facilitated through simplification of procedures and
availability of several new instruments.
In relative terms, turnover in the foreign exchange market was 6.6 times
the size of India's balance of payments during 2005-06 as compared
with 5.4 times in 2000-01. With the deepening of the foreign exchange
market and increased turnover, income of commercial banks through
such transactions increased significantly. Profit from foreign exchange
transactions accounted for more than 20 per cent of total profit of
scheduled commercial banks in the last 2 years.
43
The EMEs’ experience, in general, in the 1990s has highlighted the
growing importance of capital flows in determining the exchange rate
movements as against trade flows and economic growth in the 1980s and
before. In the case of most developing countries, which specialise in
labour-intensive and low and intermediate technology products, profit
margins in the highly competitive markets are very thin and vulnerable
to pricing power by large retail chains. Consequently, exchange rate
volatility has significant employment, output and distributional
consequences. Foreign exchange market conditions have remained
orderly in the post-1993 period, barring occasional periods of volatility.
The Indian approach to exchange rate management has been to avoid
excessive volatility. Intervention by the Reserve Bank in the foreign
exchange market, however, has been relatively small compared to total
turnover in the market.
44
great degree of volatility in international markets, particularly during the
1990s.
1947 to1977: During 1947 to 1971, India exchange rate system followed
the par value system. RBI fixed rupee’s external par value at 4.15 grains
of fine gold. 15.432grains of gold is equivalent to 1 gram of gold. RBI
allowed the par value to fluctuate within the permitted margin of ±1
percent. With the breakdown of the Bretton Woods System in 1971 and
the floatation of major currencies, the rupee was linked with Pound-
Sterling. Since Pound-Sterling was fixed in terms of US dollar under the
Smithsonian Agreement of 1971, the rupee also remained stable against
dollar.
1978-1992: During this period, exchange rate of the rupee was officially
determined in terms of a weighted basket of currencies of India’s major
trading partners. During this period, RBI set the rate by daily
announcing the buying and selling rates to authorized dealers. In other
words, RBI instructed authorized dealers to buy and sell foreign currency
at the rate given by the RBI on daily basis. Hence exchange rate
fluctuated but within a certain range. RBI managed the exchange rate in
such a manner so that it primarily facilitates imports to India. As
mentioned in Section 5.1, the FERA Act was part of the exchange rate
regulation practices followed by RBI. Joint Initiative IITs and IISc –
Funded by MHRD - 4 -NPTEL International Finance Vinod Gupta
School of Managment , IIT. Kharagpur India’s perennial trade deficit
widened during this period. By the beginning of 1991, Indian foreign
exchange reserve had dwindled down to such a level that it could barely
be sufficient for three-week’s worth of imports. During June 1991, India
airlifted 67 tonnes of gold, pledged these with Union Bank of Switzerland
45
and Bank of England, and raised US$ 605 millions to shore up its
precarious forex reserve. At the height of the crisis, between 2nd and 4th
June 1991, rupee was officially devalued by 19.5% from 20.5 to 24.5 to 1
US$. This crisis paved the path to the famed “liberalization program” of
government of India to make rules and regulations pertaining to foreign
trade, investment, public finance and exchange rate encompassing a
broad gamut of economic activities more market oriented.
46
Commodity Market
47
merchants over the functioning of the Bombay Cotton Trade Association,
a separate association, Bombay Cotton Exchange Ltd., was constituted in
1983. Futures trading in oilseeds originated with the setting up of the
Gujarati VyapariMandali in 1900, which carried out futures trading in
ground nuts, castor seeds and cotton. The Calcutta Hessian Exchange Ltd.
and the East India Jute Association Ltd. were set up in 1919 and 1927
respectively for futures trade in raw jute. In 1921, futures in cotton were
organized in Mumbai under the auspices of East India Cotton Association
(EICA). Before the Second World War broke out in 1939, several futures
markets in oilseeds were functioning in the states of Gujarat and Punjab.
Futures markets in Bullion began in Mumbai in 1920, and later, similar
markets were established in Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and
Calcutta. In due course, several other exchanges were established in the
country, facilitating trade in diverse commodities such as pepper,
turmeric, potato, sugar and jaggery.
48
trade, many traders resorted to unofficial and informal trade in futures.
However, in India‘s liberalization epoch as per the June 1980 Khusro
committee‘s recommendations, the government reintroduced futures on
selected commodities, including cotton, jute, potatoes, etc.
49
Broadly, the commodities market exists in two distinct forms—the over-
the-counter (OTC) market and the exchange based market. Further, as in
equities, there exists the spot and the derivatives segments. Spot markets
are essentially OTC markets and participation is restricted to people who
are involved with that commodity, such as the farmer, processor,
wholesaler, etc. A majority of the derivatives trading takes place through
the exchange-based markets with standardized contracts, settlements,
etc. The exchange-based markets are essentially derivative markets and
are similar to equity derivatives in their working, that is, everything is
standardized and a person can purchase a contract by paying only a
percentage of the contract value. A person can also go short on these
exchanges. Moreover, even though there is a provision for delivery, most
contracts are squared-off before expiry and are settled in cash. As a result,
one can see an active participation by people who are not associated with
the commodity. The typical structure of commodity futures
markets in India is as follows:
50
wheat, jute, cotton, coffee, major pulses (such as urad, arahar and chana),
edible oilseeds (such as mustard seed, coconut oil, groundnut oil and
sunflower), spices (pepper, chillies, cumin seed and turmeric), metals
(aluminium, tin, nickel and copper), bullion (gold and silver), crude oil,
natural gas and polymers, among others. Gold accounted for the largest
share of trade in terms of value. A temporary ban was imposed on futures
trading in urad and tur dal in January 2007 to ensure orderly market
conditions. An efficient and well-organised commodities futures market
is generally acknowledged to be helpful in price discovery for traded
commodities.
COMMODITIES TRADED
51
World-over one will find that a market exits for almost all the commodities
known to us. These commodities can be broadly classified into the
following:
52
Guargum, Guar Seed, Gurchaku, Mentha
OTHERS Oil, Potato (Agra), Potato (Tarkeshwar),
Sugar M-30, Sugar S-30
53
of their business. Hedging benefits who are involved in trading of
commodities like farmers, processors, merchandisers, manufacturers,
exporters, importers etc.
54
fluctuations. This would reduce the risk premiums associated with the
marketing or processing margins enabling more returns on produce.
Storing more and being more active in the markets. The price information
accessible to the farmers determines the extent to which
traders/processors increase price to them. Since one of the objectives of
futures exchange is to make available these prices as far as possible, it is
very likely to benefit the farmers. Also, due to the time lag between
planning and production, the market-determined price information
disseminated by futures exchanges would be crucial for their production
decisions.
55
certified warehouses have the potential to become the norm for physical
trade.
Derivatives Market
56
A derivative is a financial product which has been derived from another
financial product or commodity.
(b) “a contract which derived its value from the price, or index of prices
at underlying securities.”
The above definition conveys that the derivatives are financial products.
Derivative is derived from another financial instrument/ contract called
the underlying. A derivative derives its value from underlying assets.
57
Accounting standard SFAS133 defines a derivative as “a derivative
instrument is a financial derivative or other contract will all three of the
following characteristics:
(i) It has (1) one or more underlying, and (2) one or more notional
amount or payments provisions or both. Those terms determine the
amount of the settlement or settlements.
(iii) Its terms require or permit net settlement. It can be readily settled
net by a means outside the contract or itprovides for delivery of an asset
that puts the recipients in a position not substantially different from net
settlement.From the aforementioned, derivatives refer to securities or to
contracts that derive from another whose value depends on another
contract or assets. As such the financial derivatives are financial
instrument whose prices or values are derived from the prices of other
underlying financial instruments or financial assets. The underlying
instruments may be an equity share, stock, bond, debenture, treasury
bill, foreign currency or even another derivative asset.Hence, financial
derivatives are financial instruments whose prices are derived from the
prices of other financial instruments.
58
highly volatile financial conditions like erratic trading, highly flexible
interest rates, volatile exchange rates and monetary chaos.
59
is low. Individual and institutions may also look for arbitrage
opportunities, as when the current buying price of an asset falls below
the price specified in a futures contract to sell the asset.
60
9. Develop the complete markets : It is observed that derivative trading
develop the market towards “complete markets” complete market
concept refers to that situation where no particular investors be better of
than others, or patterns of returns of all additional securities are
spanned by the already existing securities in it, or there is no further
scope of additional security.
61
1893, Gujarat VyapariMandall in 1900, Calcutta Hesstan Exchange Ltd.
in 1919 had started future market.
The NSE and BSE are two major Indian markets have shown a
remarkable growth both in terms of volumes and numbers of traded
contracts. Introduction of derivatives trading in 2000, in Indian markets
was the starting of equity derivative market which has registered on
explosive growth and is expected to continue the same in the years to
come. NSE alone accounts 99% of the derivatives trading in Indian
markets. Introduction of derivatives has been well received by stock
market players. Derivatives trading gained popularity after its
introduction in very short time.If we compare the business growth of
NSE and BSE in terms of number of contracts traded and volumes in all
product categories with the help of table no.4, table no.5 and table no.12
62
which shows the NSE traded 636132957 total contracts whose total
turnover is Rs.16807782.22 cr in the year 2012-13 in futures and options
segment while in currency segment in 483212156 total contracts have
traded whose total turnover is Rs.2655474.26 cr in same year.In case of
BSE the total numbers of contracts traded are 150068157 whose total
turnover is Rs.3884370.96 Cr in the year 2012-13 for all segments. In the
above case we can say that the performance of BSE is not encouraging
both in terms of volumes and numbers of contracts traded in all product
categories. The table no.4, table no.5 and table no.12 summarily specifies
the updated figures since 2003-04 to 2012-13 about number of contracts
traded and total volumes in all segments
63
1995- G.S. Patel Committee recommends revised carry forward
system.
14th Dec. 1995 NSE asked SEBI for permission to trade index
futures
1996 -Revised system restarted on BSE.
18th Nov. 1996- SEBI setup LC Gupta committee to draft frame
work for index futures
11th May 1998- LC Gupta committee submitted report
1st June 1999- Interest rate swaps/forward rate agreements
allowed at BSE
7th July 1999- RBI gave permission to OTC for interest rate
swaps/forward rate agreements
24th May 2000 - SIMEX chose Nifty for trading futures and
options on an Indian index
25th May 2000- SEBI gave permission to NSE & BSE to do index
futures trading
9th June 2000-Equity derivatives introduced at BSE
12th June 2000- Commencement of derivatives trading (index
futures) at NSE
31st Aug. 2000-Commencement of trading futures & options on
Nifty at SIMEX
1st June 2001-Index option launched at BSE
Jun 2001- Trading on equity index options at NSE
July 2001 -Trading at stock options at NSE
9th July 2001-Stock options launched at BSE
July 2001 -Commencement of trading in options on individual
securities
1st Nov. 2001-Stock futures launched at BSE
64
Nov. 2001 -Commencement of trading in futures on individual
security
9th Nov. 2001-Trading of Single stock futures at BSE
June 2003 -Trading of Interest rate futures at NSE
Aug. 2003- Launch of futures & options in CNX IT index
13th Sep. 2004-Weekly options of BSE
June 2005 -Launch of futures & options in Bank Nifty index
Dec. 2006 '-Derivative Exchange of the Year by Asia risk magazine
June 2007 -NSE launches derivatives on Nifty Junior & CNX 100
Oct. 2007- NSE launches derivatives on Nifty Midcap -50
1st Jan. 2008-Trading of Chhota (Mini) Sensex at BSE
1st Jan. 2008-Trading of mini index futures & options at NSE
3rd March 2009-Long term options contracts on S&P CNX Nifty
index
NA Futures & options on sectoral indices ( BSETECK, BSE FMCG,
BSE Metal, BSE Bankex
& BSE oil & gas)
29th Aug. 2008-Trading of currency futures at NSE
Aug. 2008- Launch of interest rate futures
1st Oct. 2008-Currency derivative introduced at BSE
10th Dec. 2008-S&P CNX Defty futures & options at NSE
Aug. 2009- Launch of interest rate futures at NSE
7th Aug. 2009-BSE-USE form alliance to develop currency &
interest rate derivative markets
18th Dec. 2009-BSE's new derivatives rate to lower transaction
costs for all
Feb. 2010- Launch of currency future on additional currency pairs
at NSE
65
Apr. 2010 -Financial derivatives exchange award of the year by
Asian Banker to NSE
July 2010- Commencement trading of S&P CNX Nifty futures on
CME at NSE
Oct. 2010- Introduction of European style stock option at
NSEJournal of Business Management & Social Sciences Research
(JBM&SSR) ISSN No: 2319-5614
Oct. 2010 -Introduction of Currency options on USD INR by NSE
July 2011- Commencement of 91 day GOI trading Bill futures by
NSE
Aug. 2011 -Launch of derivative on Global Indices at NSE
Sep. 2011- Launch of derivative on CNX PSE & CNX infrastructure
Indices at NSE
30th March 2012-BSE launched trading in BRICSMART indices
derivatives
Insurance Market
66
Indian Insurance Industry has got the deep-rooted history. These
evidences are from the writings of Manu (Manusmrithi), Yagnavalkya
(Dharmasastra) and Kautilya (Arthasastra). The writings speak about
pooling of resources that could be re-distributed in times of calamities
such as fire, floods, epidemics and famine. Ancient Indian history has
preserved the very earliest traces of insurance in the form of marine
trade loans and carriers contracts. In India the Insurance has evolved
over time heavily drawing from other countries, England particularly.
In India the advent of Life Insurance started in the year 1818 with the
establishment of the Oriental Life Insurance Company in Calcutta. In the
year 1829, the Madras Equitable had began the life insurance business in
the Madras Presidency. British Insurance Act enactment was done in the
year 1870. In the last three decades of the nineteenth century, the
Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were
started in the Bombay Residency. This era, however, was dominated by
foreign insurance offices which did good business in India, namely
Albert Life Assurance, Royal Insurance, Liverpool and London Globe
67
Insurance and the Indian offices were up for hard competition from the
foreign companies.
With the emergence of growing demand for insurance, more and more
insurance companies are now emerging in the Indian Insurance
Industry. With the opening up of the economy, there are several
international leaders in the insurance of India are trying to venture into
the India insurance industry. In the year 1993, Malhotra Committee was
formed which initiated reforms in the Indian Insurance Industry. The
aim of which was to assess the functionality of the industry. It was
incharge of recommending the future path of insurance in India.It even
attempted to improve various aspects, making them more appropriate
and effective for the Indian market.
68
notified 27 Regulations on various issues like Registration of Insurers,
Regulation on insurance agents, Re-insurance, Solvency Margin,
Obligation of Insurers to Rural and Social sector, Investment and
Accounting Procedure, Protection of policy holders' interest, etc.
Types of Insurance
69
3. Liability Insurance usually insures property such as automobiles,
property and professional/business mishaps and others.
Latest developments
70
In next five year Max Groups to invest a further US$ 134.9 Million
by Max Buda, the health insurance JV between UK's Buda. Besides
the existing six cities, it plans to open up into Surat, Jaipur and
Ludhiana by the end of 2010.
The total market size of the insurance sector in India was US$ 66.4
billion in FY 13. It is projected to touch US$ 350-400 billion by 2020.
India was ranked 10th among 147 countries in the life insurance business
in FY 13, with a share of 2.03 per cent. The life insurance premium
market expanded at a CAGR of 16.6 per cent from US$ 11.5 billion to
US$ 53.3 billion during FY 03-13. The non-life insurance premium
market also grew at a CAGR of 15.4 per cent in the same period, from
US$ 3.1 billion to US$ 13.1 billion.
Digital@Insurance-20X By 2020, by Boston Consulting Group (BCG)
and Google India forecasts that insurance sales from online channels will
grow 20 times from present day sales by 2020, and overall internet
influenced sales will touch Rs 300,000-400,000 crore (US$ 49.63-66.18
billion).
Investment corpus in India's pension sector is projected to cross US$ 1
trillion by 2025, following the passage of the Pension Fund Regulatory
and Development Authority (PFRDA) Act 2013, as per a joint report by
CII-EY on Pensions Business in India.
Government Initiatives
The Union Budget 201 4-15 increased the FDI limit in insurance to 49
per cent. The increase in the FDI limit could help the insurance industry
in two ways. One, this could help companies access capital more easily
71
and, two, it could act as a trigger for listing of insurance players, which
will offer a better benchmark to value these companies.
In a bid to facilitate banks to provide greater choice in insurance
products through their branches, a proposal could be made which will
allow banks to act as corporate agents and tie up with multiple insurers.
A committee established by the Finance Ministry of India is likely to
suggest this model as an alternative to the broking model.
Road Ahead
The future of India's insurance sector looks good, driven by the country's
favourable demographic, greater awareness, supportive government
which enacts policies that improve business, customer-centric products,
and practices that give businesses the best environment to grow. India's
insurable population is anticipated to touch 75 crore in 2020, with life
expectancy reaching 74 years. Life insurance is projected to comprise 35
per cent of total savings by the end of this decade, compared to 26 per
cent in 2009-10.
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.
72
India embarked on substantial economic liberalization in 1991. In the
field of finance, the major themes were the scaling back of capital
controls and the fostering of a domestic financial system. This was part
of a new framework of embracing globalization and of giving primacy to
market-based mechanisms for resource allocation.
From 1991 to 2002, progress was made in four areas, reflecting the
shortcomings that were then evident. First, capital controls were reduced
substantially to give Indian firms access to foreign capital and to build
nongovernment mechanisms for financing the current account deficit.
Second, a new defined-contribution pension system, the New Pension
System, was set up so that the young population could achieve significant
pension wealth in advance of demographic transition. Third, a new
insurance regulator, the Insurance Regulation and Development Agency,
was set up, and the public sector monopolies in the field of insurance
were broken to increase access to insurance. Fourth and most important,
there was a significant burst of activity in building the equity market
because of the importance of equity as a mechanism for financing firms
and the recognition of infirmities of the equity market. This involved
establishing a new regulator, the Securities and Exchanges Board of
India, and new infrastructure institutions, the National Stock Exchange
and the National Securities Depository. The reforms of the equity market
involved ten acts of parliament and one constitutional amendment,
indicative of the close linkage between deeper economic reforms and
legislative change.
While all these moves were in the right direction, they were inadequate.
A large number of problems with the financial system remain
unresolved. In cross-country rankings of the capability of financial
73
systems, India is typically found in the bottom quartile of countries. A
financial system can be judged on the extent to which it caters to growth,
stability, and inclusion, and the Indian system is deficient on all of those
counts. By misallocating resources, it hampers growth. The entire
financial system suffers from high systemic risk.
The households and firms of India are extremely diverse, and often have
characteristics not seen elsewhere in the world. For finance to reach a
large fraction of firms and households, financial firms need to
energetically modify their products and processes, and innovate to
discover how to serve customers. But in the field of finance, the forces of
competition and innovation have been blocked by the present policy
framework. This means there are substantial gaps between the products
and processes of the financial system, and the needs of households and
firms.
It is likely that around 2053, India’s GDP will exceed that of the United
States as of 2013. In the coming forty years, India will need to build up
the institutional machinery for markets as complex as the financial
system seen in advanced economies today. The IFC puts India on that
path.
Solutions
74
India, the consensus on desired reforms was constructed through reports
from four expert committees on:
75
Primary Data
76
I spoke to close relatives who have had experience with the financial
markets. They have seen the Indian markets transform from the 1980’s
till the current day.
Q. What were the markets like in the 1980’s as compared to the current
day?
A. In the 1980’s there was much less use of technology. The open outcry
was still in existence which made the market place really chaotic. Now
everything is computarised therefore making trading much more
convenient and also removing the chances of human error.
Q. Have you noticed any change in the way investors trade due to the
changes made by the government?
77
Q. The value of securities traded has obviously gone up from back in the
day. Did you expect such a massive increase in the volume of trade?
78
79
80
81
82
83
Conclusion
The Indian Financial System has been in existence for centuries. From
the existence of barter trading to trading with gold to the current high
tech modes of e-finacining and trading. The current heights that the
Indian Fiancial System has reached have obviously not been attained
overnight. As the popular saying goes “Rome wasn’t built in a day” in the
same way the Indian Financial Markets have gradually expanded and
improved step by step. This project clearly outlines the strides that have
been taken by the government and the financial instituitions to improve
and modernize the markets. The numbers that have been given in the
project are a clear proof of the positive changes that have been made. If
the trend that has been set in the last 35 years or so continues in the
years to come then truly the sky is the limit for the Indian economy. The
improvement of technology and enactment of new acts has set the
economy in the right direction and the only direction is upwards. The
main markets that have been covered in the project are :
The resesarch methods that I have used also reiterate my faith in the
indian economy. As a youth of the nation I know that India is headed in
84
the right direction and I can feel safe in this nation. The above
mentioned markets are the main places where investments take place.
The seeds have been sown years back and with the introduction of the
new government and the imrpovement of technology and awareness of
the investors increasing, our nation seems destined for economic
stability and greatness!
85
Bibliography
http://study-material4u.blogspot.in/2012/07/chapter-5-indian-money-market.html
www.economictimes.com
http://www.ukessays.com/essays/india/indian-financial-
markets.php#ixzz8BoNfOjkd
http://www.ukessays.com/essays/finance/characteristics-and-features-of-capital-
markets-finance-essay.php
http://www.bis.org/review/r070523e.pdf
http://www.bis.org/review/r121218d.pdf
http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=761
http://www.pwc.in/assets/pdfs/publications-
2010/indian_financial_markets_2020_fv.pdf
http://nptel.ac.in/courses/110105031/pr_pdf/Module5-5.pdf
www.rbi.org
www.nseindia.com
http://www.marketoperation.com/index.php?option=com_content&view=article&i
d=117&Itemid=113
http://borjournals.com/Research_papers/Nov_2012/1048%20M.pdf
(http://www.indianmirror.com/indian-industries/insurance.html)
(http://www.ibef.org/industry/insurance-sector-india.aspx)
86
http://www.icai.org/post.html?post_id=994
http://carnegieendowment.org/2014/01/29/reforming-india-s-financial-system
http://www.indianmba.com/Faculty_Column/FC1063/fc1063.html
http://shodhganga.inflibnet.ac.in/bitstream/10603/3798/9/09_chapter%203.pdf
http://www.slidesandnotes.com/2011/02/history-of-forex-market-in-india.html
http://www.indianmba.com/Occasional_Papers/OP62/op62.html
http://www.iosrjournals.org/iosr-jef/papers/vol3-issue3/D0332542.pdf
https://www.dnb.co.in/BFSISectorInIndia/LifeIn2.asp
87