Constituents of Financial Market
The Indian financial market comprises, in the
• Credit market
• Money market
• Capital market
• Foreign exchange market
• Debt market
• Derivatives market
The credit market is the predominant source of finance.
The major institutional purveyor of credit in India are banks and
non-banking financial institutions, i.e., development financial
institutions (DFIs) and other financial institutions (FIs) and non-
banking financial companies (NBFCs) including housing finance
The non-institutional or unorganised sources of credit include
money-lenders, indigenous bankers and sellers for trade credit.
An important aspect of the credit market is its term structure,
viz., (i) short-term credit, (ii) medium-term credit, and (iii) long-
term credit. While banks and NBFCs predominantly cater to
short-term needs, FIs provide mostly medium and long-term
Foreign Exchange Market
The foreign exchange market in India comprises
customers, authorised dealers (ADs) and the
There has been a considerable improvement in
the forex market turnover in the recent years,
particularly during the post-reform period.
The domestic debt market comprises two main
segments, viz., the Government securities and
other (mainly corporate) securities comprising
private corporate debt, PSU bonds and DFIs
bonds. The government securities market is pre-
dominant, while the other segment is not very
deep and liquid.
Government Securities Market:
The main investors in the Government securities market in India
are commercial banks, co-operative banks, insurance companies,
provident funds, financial institutions (including term-lending
institutions), mutual funds especially the gilt funds, primary
dealers, satellite dealers, non-bank finance companies and
Secondary Market Window:
The central banks often play the role of market makers providing
two-way quotes through their sales window to infuse liquidity in
the secondary market for the Government securities.
Discount House Arrangements
Primary Dealer System:
The primary dealer system was evolved and made functional in
1996 with the objective of strengthening the securities market
infrastructure and bringing about improvement in the secondary
market trading, liquidity and turnover in Government securities
The network of satellite dealers provides retail outlets thereby
encouraging voluntary holding of Government securities among
a wide investor base. The SDs are also given limited liquidity
support from the Reserve Bank.
The Reserve Bank also encouraged setting up of mutual
funds dealing exclusively in gilts, called gilt funds with a
view to encouraging schemes of mutual funds dedicated
to Government securities and creating a wider investor
base for them.
Other Debt Markets:
The corporate debt market still constitutes a small
segment of the debt market despite policy initiatives
taken during the ‘nineties.
A large proportion of corporate debentures in India is of
hybrid variety combining features of both debt and
Financial derivatives in the Indian financial
markets are of recent origin barring trade related
forward contracts in the forex market . Recently,
over-the-counter (OTC) as well as exchange
traded derivatives have been introduced,
marking an important development in the
structure of financial markets in India.
In Europe the synergy between banking and insurance
has given rise to the concept of ‘bancassurance’ – a
package of financial services that can fulfil both banking
and insurance needs.
In India, the Reserve Bank, in recognition of the
symbiotic relationship between banking and the
insurance industries, has identified three routes of
banks’ participation in the insurance business, viz., (i)
providing fee-based insurance services without risk
participation, (ii) investing in an insurance company for
providing infrastructure and services support and (iii)
setting up of a separate joint-venture insurance
company with risk participation.