📘 5.1 The Indian Economy
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
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
