📘 5.1 The Indian Economy

📌 Overview:
The Indian economy has evolved from being agriculture-led to a robust mix of services and manufacturing — now accounting for nearly three-fourths of India’s GDP. A strong financial system is essential to support this transformation​:contentReference[oaicite:1]{index=1}.

🏦 Role of Financial Systems in Growth

  • Banking System: Provides credit to businesses and individuals
  • Securities Markets: Help raise funds via equity and debt offerings
  • Foreign Exchange Market: Facilitates global trade and investment, manages currency risk
  • Commodity Markets: Help manage price volatility in essential goods
  • Insurance Sector: Protects against risks and encourages savings

Key Insight: A well-regulated, efficient financial system fuels sustained economic growth by mobilizing and allocating capital effectively.

🌾 Agriculture-Based Past

Initially, India’s economy relied heavily on agriculture for employment and output. It formed the primary source of rural livelihood.

🏭 Industrial Development

Post-independence reforms led to industrialization, building a base in manufacturing, engineering, and production sectors.

💼 Services Boom

Today, services like IT, finance, telecom, and healthcare dominate, making India a globally recognized service economy.

📘 5.2 The Indian Financial Markets

📌 What is a Financial Market?
It is a system that facilitates the transfer of money from surplus units (investors) to deficit units (borrowers). Financial markets play a key role in allocating capital efficiently across sectors, promoting liquidity and economic growth.

💡 5.2.1 Key Features of Indian Financial Markets

💱 Efficient Capital Allocation

Markets channel surplus savings from households into productive investments through banks, mutual funds, and corporates.

💧 Liquidity

Markets ensure that financial instruments can be quickly bought or sold with minimal impact on price — encouraging participation.

🧾 Information Dissemination

Continuous price discovery helps in transparent decision-making and rational allocation of capital based on available data.

🏦 Market Categories

Includes Money Market (short term), Capital Market (long term), and supporting markets like Forex, Commodity, and Insurance.

🔄 Primary & Secondary Markets

Primary: Issuance of new securities. Secondary: Trading of existing securities among investors. Both ensure fund access and exit options.

👥 Market Participants

Banks, brokers, mutual funds, depositories, insurance firms, pension funds, and retail investors drive market depth and stability.

📘 5.4 Structure of Financial Markets in India

🏦 5.4.1 Banking System

RBI – Central Bank

Regulates monetary policy, issues currency, supervises banks, NBFCs, payment systems, and manages forex reserves.

Commercial Banks

Accept deposits, provide loans, support payments. Includes public, private, foreign, and regional rural banks.

Payment Banks

Provide small savings accounts and digital payment services. No lending allowed.

Small Finance Banks

Offer credit and deposit services to small/marginal customers and MSMEs.

NBFCs

Non-bank institutions that lend, lease, and invest — but can’t take demand deposits.

Housing Finance Companies

Specialized NBFCs for property financing — now regulated by RBI.

P2P Lending

Online platforms for person-to-person lending — regulated by RBI.

Money Market

Short-term funds market (T-bills, CP, CD, call money) used by banks and FIs.

FBIL

Publishes reference rates for forex and interest benchmarks in India.

Credit Information Companies (CICs)

Store borrower credit histories (e.g. CIBIL, Equifax) for loan risk analysis.

Account Aggregators (AA)

Licensed by RBI to securely share client data with third parties (with consent).

📈 5.4.2 Securities Market under SEBI

Securities

Includes shares, bonds, derivatives, mutual funds, and government securities.

Stock Exchanges

NSE, BSE offer transparent trading for equity, debt, and derivatives.

Clearing Corporations

Ensure trade settlement and guarantee delivery of securities and funds.

Depositories

NSDL and CDSL hold securities in demat form.

Depository Participants

Intermediaries between investors and depositories.

Custodians

Hold large volumes of institutional securities and handle settlements.

Stock Brokers

SEBI-registered agents who trade securities for clients on exchanges.

Bond & Derivative Markets

Debt: Bonds, NCDs. Derivatives: futures, options on equity/index/currency/commodity.

Mutual Funds & AIFs

AMC-managed pooled funds; AIFs are alternative investment platforms.

Investment Advisors

SEBI-registered professionals giving fee-based advisory.

KYC Registration Agencies

Centralized platforms to maintain verified investor KYC records.

Credit Rating Agencies

Evaluate issuer’s financial health for bonds/NCDs (e.g., CRISIL, ICRA).

Investment Banks & AMCs/PMs

Provide corporate finance, mergers advisory, or manage funds/portfolios.

RTA

Registrar & Transfer Agents manage mutual fund investor records & services.

🛡️ 5.4.3 Insurance Market under IRDAI

  • IRDAI regulates both Life and General Insurance
  • Life insurance products include term, endowment, ULIPs
  • General insurance covers health, motor, fire, marine, travel
  • Key players: individual agents, brokers, corporate agents, TPAs, surveyors
  • Distribution: agency, bancassurance, broking, digital platforms

👴 5.4.4 Pension Market under PFRDA

  • Regulates National Pension System (NPS) and similar schemes
  • Registers: fund managers, record keepers, POPs, trustee banks
  • Promotes voluntary retirement saving across sectors
  • Defined contribution model with investment choice
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