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India Financial Market

What is India Financial Market?


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.

Scope of the India Financial Market


The financial market in India at present is more advanced than many other sectors as it became organized as early as the 19th century with the securities exchanges in Mumbai, Ahmedabad and Kolkata. In the early 1960s, the number of securities exchanges in India became eight - 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 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. The market saw many new companies spanning across different industry segments and business began to flourish.

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) in the mid 1990s helped in regulating a smooth and transparent form of securities trading.

The regulatory body for the Indian capital markets was the SEBI (Securities and Exchange Board of India). The capital markets in India experienced turbulence after which the SEBI came into prominence. The market loopholes had to be bridged by taking drastic measures.

Potential of the India Financial Market

India Financial Market helps in promoting the savings of the economy - helping to adopt an effective channel to transmit various financial policies. The Indian financial sector is welldeveloped, competitive, efficient and integrated to face all shocks. In the India financial market there are various types of financial products whose prices are determined by the numerous buyers and sellers in the market. The other determinant factor of the prices of the financial products is the market forces of demand and supply. The various other types of Indian markets help in the functioning of the wide India financial sector.

Features of the Financial Market in India:

India Financial Indices - BSE 30 Index, various sector indexes, stock quotes, Sensex charts, bond prices, foreign exchange, Rupee & Dollar Chart Indian Financial market news Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty, company information, issues on market capitalization, corporate earning statements Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading activities, Interest Rates, Money Market, Government Securities, Public Sector Debt, External Debt Service

Foreign Investment - Foreign Debt Database composed by BIS, IMF, OECD,& World Bank, Investments in India & Abroad Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity Indexes Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes National and Global Market Relations Mutual Funds Insurance Loans Forex and Bullion

If an investor has a clear understanding of the India financial market, then formulating investing strategies and tips would be easier.

Various financial markets in India

Capital Market Capital Market consists of primary market and secondary market. In primary market newly issued bonds and stocks are exchanged and in secondary market buying and selling of already existing bonds and stocks take place. So, the Capital Market can be divided into Bond Market and Stock Market. Bond Market provides financing by bond issuance and bond trading. Stock Market provides financing by shares or stock issuance and by share trading. As a whole, Capital Market facilitates raising of capital. Money Market Money Market facilitates short term debt financing and capital.

Derivatives market Derivatives Market provides instruments which help in controlling financial risk. Foreign Exchange market Foreign Exchange Market facilitates the foreign exchange trading. Insurance Market Insurance Market helps in relocation of various risks. Commodity Market Commodity Market organizes trading of commodities.

1. Foreign Exchange Market


Foreign Exchange Market in India
Foreign Exchange Market in India operates under the Central Government of India and executes wide powers to control transactions in foreign exchange. The Foreign Exchange Management Act, 1999 or FEMA regulates the whole Foreign Exchange Market in India. Before the introduction of this act, the foreign exchange market in India was regulated by the Reserve Bank of India through the Exchange Control Department, by the Foreign Exchange Regulation Act or FERA, 1947. After independence, FERA was introduced as a temporary measure to regulate the inflow of the foreign capital. But with the Economic and Industrial development, the need for conservation of foreign currency was urgently felt and on the recommendation of the Public Accounts Committee, the Indian

government passed the Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA.

Early Years of Foreign Exchange Market

Until 1992, all Foreign Investments in India and the repatriation of Foreign Capital required previous approval of the government. The Foreign Exchange Regulation Act rarely allowed foreign majority holdings for Foreign Exchange in India. However, a new Foreign Investment Policy announced in July 1991, declared automatic approval for Foreign Exchange in India for thirty-four industries. These industries were designated with high priority, up to an equivalent limit of 51 percent. The foreign exchange market in India is regulated by the Reserve Bank of India through the Exchange Control Department.

Initially, the Government required that a company`s routine approval must rely on identical exports and dividend repatriation, but in May 1992, this requirement of Foreign Exchange in India was lifted, with an exception to low-priority sectors. In 1994, foreign nationals and non-resident Indian investors were permitted to repatriate not only their profits but also their capital for Foreign Exchange in India. Indian exporters enjoyed the freedom to use their export earnings as they found it suitable. However, transfer of capital abroad by Indian nationals is only allowed in particular circumstances, such as emigration. Foreign Exchange in India is automatically made accessible for imports for which import licenses are widely issued.

Growth and performance of various financial markets in India

Foreign Exchange Rate Policy in India Indian authorities are able to manage the Exchange Rate easily, only because Foreign Exchange Transactions in India are so securely controlled. From 1975 to 1992 the Rupee was coupled to a trade-weighted basket of currencies. In February 1992, the Indian Government started to make the Rupee convertible, and in March 1993 a single floating Exchange Rate in the market of Foreign Exchange in India was implemented. In July 1995, Rs 31.81 was worth US$1, as compared to Rs 7.86 in 1980, Rs 12.37 in 1985, Rs 17.50 in 1990, Rs 44.942 in 2000 and Rs 44.195 in the year 2011. Since the onset of liberalisation, Foreign Exchange Markets in India have witnessed explosive growth in trading capacity. The importance of the Exchange Rate of Foreign Exchange in India for the Indian Economy has also been far greater than ever before. While the Indian Government has clearly adopted a flexible exchange rate regime, in practice the Rupee is one of most resourceful trackers of the US dollar. Predictions of capital flow-driven currency crisis have held India back from Capital Account Convertibility, as stated by experts. The Rupee`s deviations from Covered Interest Parity, as compared to the Dollar, display relatively long-lived swings. An inevitable side effect of the Foreign Exchange Rate Policy in India has been the ballooning of Foreign Exchange Reserves to over a hundred Billion Dollars. In an unparalleled move, the Government is considering to use part of these reserves to sponsor in frastructure investments in the country.

Growth of Foreign Exchange Market in India


The Foreign Exchange Market in India is growing very rapidly, since the annual turnover of the market is more than $400 billion. This Foreign Exchange transaction in India does not include the Inter-Bank transactions.

According to the record of Foreign Exchange in India, Reserve Bank of India released these transactions. The average monthly turnover in the merchant segment was $40.5 billion in 2003-04 and the Inter-Bank transaction was $134.2 for the same period. The average total monthly turnover in the sector of Foreign Exchange in India was about $174.7 billion for the same period. The transactions are made on spot and also on forward basis, which include currency swaps and interest rate swaps. The Indian Foreign Exchange Market is made up of the buyers, sellers, market mediators and the Monetary Authority of India. The main centre of Foreign Exchange in India is Mumbai, the commercial capital of the country. There are several other centres for Foreign Exchange Transactions in India including the major cities of Kolkata, New Delhi, Chennai, Bengaluru, Pondicherry and Cochin. With the development of technologies, all the Foreign Exchange Markets of India work collectively and in much easier process.

Foreign Exchange Dealers Association is a voluntary association that also provides some help in regulating the market. The Authorised Dealers and the attributed brokers are qualified to participate in the Foreign Exchange Markets of India. When the Foreign Exchange Trade is going on between Authorized Dealers and Reserve Bank of India or between the Authorised Dealers and the Overseas Banks, the brokers usually do not have any role to play. Besides the Authorised Dealers and Brokers, there are some others who are provided with the limited rights to accept the Foreign Currency or Travellers` Cheque; they are the Authorised Moneychangers, Travel Agents, certain Hotels and Government Shops. The IDBI and Exim Bank are also permitted at specific times to hold Foreign Currency. The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives are taken by the Central Government in order to strengthen the foundation

The factors affecting for the forex markets on the Indian economy As we know that Forex market for Indian currency is highly volatile where one cannot forecast exchange rate easily, there is a mechanism which works behind the determination of exchange rate. One of the most important factors, which affect exchange rate, is demand and supply of domestic and foreign currency. There are some other factors also, which are having major impact on the exchange rate determination. After studying research reports on relationship between Rupee and Dollar of last four years we identified some factors, which have been segregated under four heads. These are: 1. 2. 3. 4. Market Situations. Economic Factors. Political Factors. Special Factors.

1. Market Situations: India follows the floating rate system for determining exchange rate. In this system market situation also is pivot for determining exchange rate. As we know that 90% of the Forex market is between the inter-bank transactions. So how the banks are taking the decision for settling out their different exposure in the domestic or foreign currency that is impacting to the exchange rate. Apart from the banks, transactions of exporters and importers are having impact on this market. So in the day-to-day Forex market, on the basis of the bank and traders transactions the demand and supply of the currencies increase or decrease and that is deciding the exchange rate. On the basis of this study we found out the different types of the decisions, which is affecting to market. These are as follows:

In India, there are big Public Sectors Units (PSUs) like ONGC, GAIL, IOC etc. all the

foreign related transactions of these PSUs are settled through the State Bank of India. E.g. India is importing Petroleum from the other countries so payment is made through State Bank of India in the foreign currency. When State Bank of India (SBI) sells and buys the foreign currency then there will be noticeable movement in the rupee. If the SBI is going for purchasing the Dollar then Rupee will be depreciated against Dollar and vice versa.

Foreign Institutional Investors (FIIs) inflow and outflow of the currency is having the

major impact on the currency. E.g. U.S. based company is investing their money through the Stock markets BSE or NSE so her inflows of the Dollars is increasing and when it is selling out their investments through these Stock markets then outflows of the Dollars are increasing. However if the FIIs inflowing the capital in the country then there will be the supply of the foreign currency increases and Demand for the Rupee will increases and that will resulted appreciation in the rupee and vice versa.

Importer and Exporters trading is also affecting to the rupee. Like if an Indian exported

material to U.S. so he will get his payments in Dollars and that will increase the supply of Dollars and increase of demand of rupee and that will appreciate the rupee and vice versa.

Banks can be confronted different positions like oversold or over bought position in the

foreign currency. So bank will try to eradicate these positions by selling or purchasing the foreign currency. So this will be increased or decreased demand and supply of the currency. And that will cause to appreciation or depreciation in the currency.

As we know that in India there is a floating rate system. In India Central Bank (RBI) is

always intervene in the trade for smoothen the market. And this RBI can achieve by selling foreign exchange and buying domestic currency. Thus, demand for domestic currency which, coupled with supply of foreign exchange, will maintain the price foreign currency at the desired level. Interventions can be defined as buying or selling of foreign currency by the central bank of a country with a view to maintaining the price of a given currency against another currency. US Dollar is the currency of intervention in India. 2. Economic Factors: In the Forex Market Economic factors of the country is playing the pivot role. Every country is depending on its prospect economy. If there will be change in any economy factors, which will directly or indirectly affected to Forex market. Here there are two types of economic factors. These are as follows: 1. 2. Internal Factors. External Factors.

Internal Factors includes:


Industrial Deficit of the country. Fiscal Deficit of the country. GDP and GNP of the country. Foreign Exchange Reserves. Inflation Rate of the Country. Agricultural growth and production. Different types of policies like EXIM Policy, Credit Policy of the country as well reforms Infrastructure of the Country Export trade and Import trade with the foreign country. Loan sanction by World Bank and IMF Relationship with the foreign country. Internationally OIL Price and Gold Price. Foreign Direct Investment, Portfolio Investment by the country.

undertaken in the yearly Budget.

External Factors includes:


3. Political Factors: In India election held every five years mean thereby one party has rule for the five years. But from the 1996 India was facing political instability and this type of political instability has created hefty problem in the different market especially in Forex market, which is highly volatile. In fact in the year 1999 due to political uncertainty in the BJP Government the rupee has depreciated by 30 paise in the month of April. So we can say that political can become important factor to determine foreign exchange in India. Due to political instability there can be possibility of de possibility delaying implementation of all policies and sanction of budget. So that will create also major impact on trade.

4. Special Factors:

Till now we have seen the general factors, which will affect the Forex market in daily

business. And on that factors the different players in the market have taken the decision. But some times some event happened in such a way that it will really change the whole scenario of the market so we can called that event special factors. However traders have to really consider those things and take the decisions. We will see these types of factors in detailed:

In the year 1998, when Government of India has done Pokhran Nuclear Test at that time

rupee has been depreciated around 85 paise in day and 125 paise in seven days. Her main fear was that U.S., Australia and other countries have stop to sanctions the loans So this type of event will have major impact on the market. And due to this the decision procedure of the trader also varies.

In the year 2000,India has faced Kargil war, which is also affected to the market. By this

war the defense expenditures are raised and due to that there will be increase in the fiscal deficit. And become obstacle in the growth of the economy. So this type of event has impact on the Forex market.

Impact of forex markets on the Indian economy


Impact on money supply In context of the Indian financial system, the relevant factor is that the increase in foreign currency reserves as a result of the larger foreign inward remittances, lead to increase in money supply; finding its way into the money market and capital market through the banking system. Banks create credit and any inflow into the banking system gets multiplied by a factor. This factor depends on the reserves maintained by banks. If banks maintain n average reserve of 25%, any inflow into the banking system will increase money supply four times. Similarly, any contraction of funds available with the banks will result in a four-fold reduction in money supply. Increase and decrease in the foreign exchange reserves of the country impact the financial system through increase or decrease in money supply.

How foreign currency Fluctuations Impact the Indian Economy To better understand the fluctuating dollar value against the rupee, let us get to know some basics: Indian foreign exchange rate system India FX rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital into India in US dollar Impact of dollar fluctuations on the Indian economy Until the 70s and 80s India aimed at to be self-reliant by concentrating more on imports and allowing very little exports to cover import costs. However, this could not last long because the oil price rise in the 1970s and 80s created a big gap in Indias balance of payment. Balance of payment (BOP) of any country is the balance resulting from the flow of payments/receipts between an individual country and all other countries as a result of import/exports happening between an individual country, in our case India and rest of the world. This gap widened during Iraqs attempt to take over Kuwait. Thereafter, exports also contributed to FX reserve along with Foreign Direct Investment into the Indian economy and reduced the BOP gap Indian rupee appreciation against dollar impacted heavily to the following: 1. Exporters 2. Importers 3. Foreign investors Exports from India are of handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, chemicals and related products. Since the 1990s, India is the worlds largest processor of diamonds.

The mentioned export items contribute substantially to foreign receipts. During the periods when the dollar was moving high against the rupee, exporters stood to gain, when $1 = Rs. 48, was getting them Rs. 4800 for every $100. Since the beginning of the year 2007, rupee appreciated by about 10%. With its value of rupee Rs. 39.35 = $1 as on 16 Nov 2007, for every $100, exporters would get only Rs. 3935. This difference is towing away the profit margins of exporters and BPO service providers alike. Imports to India are of petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. With the same scenario as given for export, if we analyze - an importer is paying Rs. 3935 now instead of Rs. 4800 paid during yester years for every $100. This gain on FX is likely to create savings in cost, which could be passed on to consumers, thereby contributing to control inflation Foreign investment into India is also contributing well to dollar depreciation against dollar. With the recent liberalized norms on foreign investment policy like Foreign investment of up to 51% equity limit in high priority industries; foreigners & NRIs are allowed to repatriate their profits and capital with exception for Indian nationals who were allowed to do so only under special circumstances; allowing free usage of export earnings to exporters, made foreign investment in India very attractive. It is this favorable atmosphere which made FX reserve surplus in US dollar and helped rupee to appreciate Conclusively, appreciation and depreciation of rupee cannot certainly be taken as beneficial to the Indian economy in general. On one hand the rupee appreciation will affect exporters, BPOs, etc., on the other, rupee depreciation will affect importers. So now it depends on what the future has to reveal for, how effectively the central bank can balance the FX rates with little impact to the relative areas of FX usage. Can the Dollar remain king or not, is no longer a million dollar question, but a million Rupee question! The movement towards market determined exchange rates in India began with the official devaluation of the rupee in July 1991.

In March 1992 a dual exchange rate system was introduced in the form of the Liberalized Exchange Rate Management System (LERMS). Under this system all foreign exchange receipts on current account transactions were required to be submitted to the Authorized dealers of foreign exchange in full, who in turn would surrender to RBI 40% of their purchases of foreign currencies at the official exchange rate announced by RBI. The balance 60% could be retained for sale in the free market. As the exchange rate aligned itself with market forces, the Re/$ rate depreciated steadily from 25.83 in March 1992 to 32.65 in February 1993. The LERMS as a system in transition performed well in terms of creating the conditions for transferring an augmented volume of foreign exchange transactions onto the market. Consequently, in March 1993, India moved from the earlier dual exchange rate regime to a single, market determined exchange rate system. The deepening of the foreign exchange market has been aided by the implementation of some of the recommendations of the Sodhani Committee on Foreign Exchange Markets (1995) and the Tarapore Committee on Capital Account Convertibility (1997). The Sodhani Committee (1995) made recommendations to develop, deepen and widen the forex market. A number of its recommendations regarding introduction of various products and removal of restrictions in foreign exchange markets to improve efficiency and increase integration of domestic foreign exchange markets with foreign markets have been implemented. Liberalisation measures undertaken on the capital account relate to foreign direct investment, portfolio investment, investment in joint ventures/wholly owned subsidiaries abroad, project exports, opening of Indian corporate offices abroad, and raising of Exchange Earners Foreign Currency entitlement.

Development of the Foreign Exchange Market


The Sodhani Committee (1995) made recommendations to develop, deepen and widen the forex market. It suggested introduction of various products and removal of restrictions to improve efficiency.

Recommendations implemented by RBI include:

For Banks freedom to Fix overnight position or gap limit Initiate trading position in overseas markets Borrow or invest funds in the overseas markets (within limits) Determine interest rates and maturity period of FCNR deposits Use derivative products for asset liability management Exemption of inter-bank borrowings from statutory requirements

For corporates Permission to hedge anticipated exposures Freedom to cancel and rebook forward contracts Some freedom in managing exposures and access to lower cost option strategies For improvements in internal controls Framing risk management guidelines for banks Adopting Basle committee norms or computing foreign exchange position limits Among recommendations not implemented are: Inducting Development Financial Institutions as full fledged Authorised Dealers Setting up a forex clearing house Permitting corporates to undertake margin trading Setting up off-shore banking units in Mumbai

While trade flows and foreign investment have had a role to play in the determination of the exchange rate, another important development that has led to the capital movements has been the reform that has taken place in other segments of financial markets in India. This has led to increasing integration of broad segments of the market such as the money market, government securities, capital market and the foreign exchange market. Market participants and move from one market to the other leading to inter-linking of these markets.

The link between the forex and domestic market has increased due to the freedom given to banks to maintain foreign currency assets and liabilities that can be swapped into rupees and vice versa. On the liabilities side there are foreign currency borrowings from overseas offices, borrowings for lending to exporters, foreign currency non-resident deposits (FCNR-B) deposits and Exchange Earners Foreign Currency deposits of corporates. Banks are permitted to use these funds either for raising rupee resources through swaps or for lending in foreign currency. Banks have been allowed to lend in foreign currency to companies in India for any productive purpose without linking to exports or import financing. Corporates can substitute rupee credit for foreign credit as they now have the choice to borrow either in foreign currency or rupees depending on the cost, taking both interest cost and exchange risk into account (Reddy, 1999). Evidence suggests that the nineties have seen growing inter-linkages between money, foreign exchange and government securities markets.

Shortcoming and weaknesses of forex markets in India


Rupee depreciated by 20 per cent in a span of five months, suffering the biggest hit during November-December when it touched a record low of 54.30 per dollar. Since the start of January, though, the Indian currency has been on a recovery mode - mostly as a consequence of concrete measures taken by the Reserve Bank of India (RBI) in past two months.

With volumes thinning as compared to other currency markets, the rupee-dollar market sways to the whims of the overseas investors as they pull out or flood the domestic markets with capital flows. Historical data also shows how the rupee gradually moved in one direction over a period of time and then the other. For instance, the rupee appreciated by over 16 per cent in 18 months to 39 levels against the greenback in January 2008. However, it was followed by depreciation of over 32 per cent in a much shorter period of time.

Economists attribute the unidirectional movement of the Indian currency against the greenback to the thinner volume as compared to the other cross currency markets. As per data from the Clearing Corporation of India, the average daily volumes in the forex market were about $20 billion in the month of December 2011. Also, foreign institutional investors (FIIs) in India often tend to move in similar directions at a particular point in time, exerting stronger influence on the exchange rate in the near-term. Rupee depreciated by 20 per cent in a span of five months, suffering the biggest hit during November-December when it touched a record low of 54.30 per dollar. Since the start of January, though, the Indian currency has been on a recovery mode - mostly as a consequence of concrete measures taken by the Reserve Bank of India (RBI) in past two months.

With volumes thinning as compared to other currency markets, the rupee-dollar market sways to the whims of the overseas investors as they pull out or flood the domestic markets with capital flows. The rupee has appreciated by around seven per cent in January, even as the dollar index went from 80.18 to 78.87 and the euro appreciated 1.3 per cent in the same period.

In November, when the rupee fell from 49 to 52 levels, economists at HSBC Global Research had noted the markets perception of (RBIs) foreign exchange policy had played an important part in recent rupee weakness. In a report, they said, The RBI appeared to be quick to act against rupee weakness in September but was equally quick to rebuild its foreign exchange reserves in October. They added, So, this has left the impression that policymakers are willing to accept rupee weakness as a necessary part of the economys rebalancing, provided the currencys weakness from current levels is measured.

Money Market

The Indian Money Market involves a wide range of instruments. Here, maturities range from one day to a year, issued by banks and corporate of various sizes. The money market is also closely linked with the Foreign Exchange Market through the process of covered interest arbitrage in which the forward premium acts as a bridge between domestic and foreign interest rates. To analyze the interest rates that characterize the Indian Money Market, the following elements need to be covered: The term structure of interest rate. The difference between domestic and international interest rates The market structure differences between the auction markets that clear continuously and the customer markets. The credit speed between instruments involving similar maturity but diverse risk factor.

Impact of Money Market in Indian economy


Money markets fulfil the short-term monetary requirements of corporations, the government, banks and other financial institutions. The maturity of these short-term loans is usually up to thirteen months. Money markets use different instruments, such as bankers acceptances, Treasury bills, commercial papers and repurchase agreements, to borrow or lend money. These instruments are mostly influenced by the central banks policies, inflation and the rates of interest. The interest rates on these instruments are usually based on the LIBOR (London Interbank Offered Rate).

Money Market Instruments Money markets impact economies by providing the necessary funds to large institutions. This, in turn, helps in maintaining the liquidity-profit balance. Popular money market instruments include: Bankers acceptance: These are bank drafts and are extremely safe investments. Certificates of deposit (CDs): These are deposits made in a bank for a fixed term. These are also issued by credit union and thrifts to raise immediate funds. Since investments in CDs are time bound, they offer a higher interest rate. CDs of high denominations may be sold before the expiry of the term. Commercial papers: These are unsecured notes issued by large corporations with high creditworthiness and banks to fulfil their short-term obligations. These papers are not backed by banks and hence are sold at a discount to their face value. Commercial papers have a lock-in period of up to 270 days. Federal agency short-term securities: These are securities, such as the Farm Credit System and the Federal Home Loan Banks, which are issued by the US government. Other US government bodies also issue papers, such as municipal notes and Treasury bills, to obtain funds to repay the debt liabilities and immediate expenses.

Risk in Money Markets


Instruments in the money markets vary in terms of their risk quotient. When arranged in the increasing order of risk, treasury bills come first, followed by bankers acceptances, certificates of deposits and commercial papers. However, instruments with the lowest risk also offer the lowest returns.

The money market attracts risk-averse lenders. This is because the borrowers are all big names and trade securities that are associated with low risk and high liquidity, albeit at a low yield.

Factors Affecting Money Market 1 Lending activity. Depositors and borrowers are somewhat dependent upon one another. Borrowers depend on depositors to supply banks with the capital needed to make loans. Depositors need borrowers to make lending a profitable activity for banks, so that banks will pay more--that is, offer higher rates on money market accounts and other deposits--to attract that capital. Lending was one of the primary victims of the financial crisis. Banks, borrowers, and depositors could now all benefit from its recovery. 2. Unemployment. Employment is always a key foundation of economic strength, and improvement in employment is especially important with the unemployment rate still in doubledigits. Employment growth will also help ease foreclosures. So far, despite signs of some growth in the economy, there has been barely any improvement in the unemployment rate. This is not unusual--historically, it has taken about six months on average after the end of a recession before unemployment peaks and starts to improve 3. Commodity and producer prices. Rising commodity and producer prices could choke off a fragile economic recovery and fan the flames of inflation. Higher money market account rates are not much good to you if inflation is rising even faster. 4. Inflation. Commodities and producer prices are just part of the mix that determines consumer prices. Inflation turned positive again in late 2009, which is nothing out of the ordinary. Whether inflation remains moderate.

Defects and Weaknesses of Indian Money Market


A well-developed money market is a necessary pre-condition for the effective implementation of monetary policy. The central bank controls and regulates the money supply in the country through the money market. However, unfortunately, the Indian money market is inadequately developed, loosely organised and suffers from many weaknesses. Major defects are discussed below: 1. Dichotomy between Organised and Unorganised Sectors: The most important defect of the Indian money market is its division into two sectors: (a) the organised sector and (b) the unorganised sector. There is little contact, coordination and cooperation between the two sectors. In such conditions it is difficult for the Reserve Bank to ensure uniform and effective implementations of monetary policy in both the sectors. 2. Predominance of Unorganised Sector: Another important defect of the Indian money market is its predominance of unorganised sector. The indigenous bankers occupy a significant position in the money-lending business in the rural areas. In this unorganised sector, no clear-cut distinction is made between short-term and longterm and between the purposes of loans. These indigenous bankers, which constitute a large portion of the money market, remain outside the organised sector. Therefore, they seriously restrict the Reserve Bank's control over the money market, 3. Wasteful Competition: Wasteful competition exists not only between the organised and unorganised sectors, but also among the members of the two sectors. The relation between various segments of the money market is not cordial; they are loosely connected with each other and generally follow separatist tendencies. For example, even today, the State Bank of Indian and other commercial banks look down upon each other as rivals. Similarly, competition exists between the Indian commercial banks and foreign banks.

4. Absence of All-India Money Market: Indian money market has not been organised into a single integrated all-Indian market. It is divided into small segments mostly catering to the local financial needs. For example, there is little contact between the money markets in the bigger cities, like, Bombay, Madras, and Calcutta and those in smaller towns. 5. Inadequate Banking Facilities: Indian money market is inadequate to meet the financial need of the economy. Although there has been rapid expansion of bank branches in recent years particularly after the nationalisation of banks, yet vast rural areas still exist without banking facilities. As compared to the size and population of the country, the banking institutions are not enough. 6. Shortage of Capital: Indian money market generally suffers from the shortage of capital funds. The availability of capital in the money market is insufficient to meet the needs of industry and trade in the country. The main reasons for the shortage of capital are: (a) low saving capacity of the people; (b) inadequate banking facilities, particularly in the rural areas; and (c) undeveloped banking habits among the people. 7. Seasonal Shortage of Funds: A Major drawback of the Indian money market is the seasonal stringency of credit and higher interest rates during a part of the year. Such a shortage invariably appears during the busy months from November to June when there is excess demand for credit for carrying on the harvesting and marketing operations in agriculture. As a result, the interest rates rise in this period. On the contrary, during the slack season, from July to October, the demand for credit and the rate of interest decline sharply. 8. Diversity of Interest Rates:

Another defect of Indian money market is the multiplicity and disparity of interest rates. In 1931, the Central Banking Enquiry Committee wrote: "The fact that a call rate of 3/4 per cent, a hundi rate of 3 per cent, a bank rate of 4 per cent, a bazar rate of small traders of 6.25 per cent and a Calcutta bazar rate for bills of small trader of 10 per cent can exist simultaneously indicates an extraordinary sluggishness of the movement of credit between various markets." The interest rates also differ in various centres like Bombay, Calcutta, etc. Variations in the interest rate structure are largely due to the credit immobility because of inadequate, costly and time-consuming means of transferring money. Disparities in the interest rates adversely affect the smooth and effective functioning of the money market. 9. Absence of Bill Market: The existence of a well-organised bill market is essential for the proper and efficient working of money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of India, the bill market in India has not yet been fully developed. The short-term bills form a much smaller proportion of the bank finance in India as compared to that in the advanced countries.

Many factors are responsible for the underdeveloped bill market in India
(i) Most of the commercial transactions are made in terms of cash. (ii) Cash credit is the main form of borrowing from the banks. Cash credit is given by the banks against the security of commodities. No bills are involved in this type of credit. (iii)The practice of advancing loans by the sellers also limits the use of bills. (iv) There is lack of uniformity in drawing bills (bundles) in different parts of the country. (v) Heavy stamp duty discourages the use of exchange bills. (vi) Absence of acceptance houses is another factor responsible for the underdevelopment of bill market in India.

(vii) In their desire to ensure greater liquidity and public confidence, the Indian banks prefer to invest their funds in first class government securities than in exchange bills. (viii) The Reserve Bank of India also prefers to extend rediscounting facility to the commercial banks against approved securities.

Steps and Measures taken by government for improving Indian Money Market
On account of the disorganised condition of the money market, the Reserve Bank is not able to enforce its monetary measures effectively in order to realise the objectives of a uniform monetary policy and its influence over credit control. The Reserve Bank and the government, as such, are keen on removing the deficiencies of the Indian money market. From time to time, various steps have been taken in this direction, yet no desired results have been observed. The following is a brief resume of the measures suggested and/or undertaken, from time to time, for improving the organisation of the money market in India: (1) Legislative Measure: The Unserious Loans Act, 1918. In 1918, the Government of India passed a law to check usury, under the Usurious Loans Act. Similarly, laws were enacted to compel money-lenders to maintain proper registers and accounts of their lending business. Money-lenders were also required to obtain licenses for carrying on their lending business.

(2) Co-operative Movement:

Further, as an alternative to money-lenders in rural finance, the development of co-operative credit societies has been encouraged by government since Independence. By 1975, about 158,000 primary agricultural credit societies, with an approximate membership of 41.5 million, have been established. Co-operative banking is regarded as the only practical solution to usury. Thus, the former has a significant role to play in the present structure of the Indian financial system. To place co-operative banking on more scientific lines and to regulate it properly, the Banking Laws (Application to Co-operative Societies) Act was passed in 1964.

(3) Agricultural Refinance and Development Corporation: To meet the credit needs of the agriculturists more comprehensively, the Agricultural Refinance Corporation was established in 1963, which refinances long-term loans furnished by Land Mortgage Banks and other credit institutions. It was replaced by the National Bank for Agriculture and Rural Development (NABARD) in 1982. (4) Agricultural Credit Board: Recently, the Agricultural Credit Board of the Reserve Bank has introduced a scheme to link borrowings from the Reserve Bank with deposit mobilisation by central co-operative banks. (5) Rural Banks: In 1970, a scheme to finance primary agricultural credit societies by the commercial banks was introduced. Thus, a link between co-operatives and joint-stock banks was created. In this context, it is interesting to note that a suggestion was made by the Banking Commission for constituting a rural bank for replacing the weak primary credit societies and, consequently, the affairs of rural banks were made the responsibility of the commercial banks. Recently, steps have been taken to establish regional banks.

(6) Extension of Credit Guarantee Scheme: The Credit Guarantee Scheme of the Reserve Bank was extended to co-operative banks to enhance public confidence in co-operative banking. (7) Link between Indigenous Bankers and Commercial Banks: Steps were taken to establish relations between indigenous bankers and commercial banks. Those indigenous bankers who are on the approved list of joint-stock banks and the State Bank of India are entitled to receive cash credit from these banks against demand promissory notes signed by two of their bankers.

(8) Bill Market Schemes: To develop the bill culture in the Indian money market, the Reserve Bank of India introduced two schemes, viz., (i) the Bill Market Scheme, 1952, and (ii) the New Bill Market Scheme, 1970, but with no commendable success. (9) Nationalisation of Banks: Commercial banks in India were originally in the private sector. Because these banks neglected agriculture and other priority sector, the Government of India took the bold decision to nationalise a number of commercial banks. Eventually, in 1969, fourteen major commercial banks were nationalised. Nationalised banks have made considerable progress in the rural areas in financing the priority sectors. (10) Lead Bank Scheme: In December 1969, the Reserve Bank introduced a "Lead Bank Scheme" to eliminate banking deficiencies in rural areas. The Lead Bank Scheme implied the area approach to development.

The Scheme entrusted individual banks with the responsibility to locate growth centres, assess deposit potential and identify credit gaps and to evolve a coordinated programme for each district. (11) Spread of Post-Offices Savings Banks: The facilities of post-office banks are spread over the entire country. By 1978, there were 1.30 lakh post- offices possessing banking units. About 4/5ths of the branches were located in rural areas.

Future Market
A futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short).

Factors Affecting Future Market


Any investor with an exposure to the futures market needs a grasp of the various factors that affect futures. Here is an overview:

General Factors As with any investment, the general economic condition of the country plays an important role in establishing the futures market sentiment. A booming economy is the basis for expectation of price rise. Futures traders may opt to go long in a flourishing economy to make profits when prices rise in future. Political stability or uncertainty can have a major impact on futures prices as these directly affect the economy of the country. The growth prospects for a particular sector of the economy should also be a consideration before making an investment in futures. Factors Influencing Commodity Futures Commodities form an important segment of the futures markets. Any factors affecting the supply or cost of production of a particular commodity affects its futures contracts. For example, unfavorable weather can have a major effect on the futures of an agricultural commodity. Traders will expect supply to dry up in coming months causing the price to go up. Most traders will want to go long on the commodity, expecting price to rise. This will push the price up for futures of the commodity. Export import policies and restrictions may have a bearing on how futures trade when the goods are actually deliverable. Considering that many futures trades are often cross border transactions, complicated export import formalities can lower prices.

Factors Influencing Currency Futures Currency futures are influenced by many factors, most important being the policies of the Federal Reserve and the US Treasury regarding money supply. Government policies regarding taxation and other decisions to bring down inflation will also have an effect on currency futures. The recent performance of the dollar versus the opposite currency in the contract plays an important role in determining the price at which a futures contract can be struck. GDP growth and trade deficit should also be considered when trading in currency futures.

Factors Influencing Index Futures and Single Stock Futures (SSFs) Index and single stock futures are influenced by many of the same factors as the delivery based stock market. High interest rates, changes in taxation policies, market sentiment, GDP growth etc affect the prices of these futures. SSFs move largely in line with the current price movement of that stock in the market, with some premium or discount based on the expected direction that the stock price will move in.

Reforms taken by Government


FTIL, MCX and NAFED have joined together to set up National Spot Exchange Ltd. To provide a Nation-wide Electronic Trading platform. NSEL to provide state of the art trading, delivery and settlement facility which can be accessed across the country. Establish Modern Terminal Market, where any farmer can trade their crops directly without any intermediaries. In this system Government have establish APMC act and according to act the farmer can sale their crops directly. Setting up of special commodity market and setting different market for different things. Power of state for exempt of market fee. Future trading permitted in agricultural commodities for better price risk management and price discovery. Expansion of scientific storage facility in rural areas Making information system (AGMARKNET) to facilitate market intelligence services and market led extension to encourage demand driven quality production Facilitation for e-trading through electronic spot exchange.

Weaknesses
Although futures are an important tool in maintaining stable prices in the economy, the risks in these trades are also quite high, especially because of leverage. Speculators, in particular, must be very cautious when investing in futures because of the unpredictability and potential of huge losses. These risks are addressed to some extent by the various limitations and regulations that are imposed on futures trading. Restrictions on Traded Commodities Only certain types of commodities can be the basis for futures trading. The shelf life, the price volatility and the state of the commodity (processed or unprocessed) determines whether it can be used in a futures contract. Ticks There is a minimum price movement (upwards or downwards) that can take place for futures of an underlying commodity. This is known as a tick. The contract liquidation prices are also regulated by price change limits. Position limits A futures trader is also limited by the number of futures contracts he can hold. This regulation makes sure that no single investor can manipulate the market of a particular commodity. In addition to these limitations, there are some specific government restrictions on futures trading. The Commodity Exchange Act governs futures trading in the US. The Commodity Futures Trading Commission (CFTC) is an independent agency, which enforces the regulations outlined in this Act. The CFTC also oversees the working of the National Futures Association. The NFA is a selfregulated body which sets out the code of conduct for futures traders to follow.

Brokers can only transact futures trades if they are registered with the CFTC and the NFA. This mandatory registration gives the CFTC some degree of control over how business is conducted within the brokers offices. Legal action can be taken by the CFTA against brokers found violating the regulations. Investors may also be barred from futures trading if it is found that they have breached any of the legal regulations outlined by these regulatory bodies.

Introduction to Commodity Market:


Commodity market is the oldest market in which consumable commodities are purchased and sold. This market had been started after starting of agricultural product marketing. The modern commodity market has become the part of financial market like stock market, bond market and foreign exchange market. Large numbers of commodity vendors have physical shops, retail hubs (like More of Aditya Birla Retail Limited) in different cities of different countries. Commodities can purchased for direct consumption for further production. You can be listening daily commodity rates on radio or read from your national news paper. Prices of commodities are fixed on the actual supply and demand of market. So far it may possible that today rates will differ from yesterday prices. Classification of Commodity Market

Ever since the first national level commodity exchange was introduced in 2003, commodity exchanges have seen an exponential growth. In the last fiscal, that is, 2010-11 the total turnover of the Indian commodity markets was approximately Rs.112.52 trillion, an increase of more than 50% as compared to the year 2009-10. Currently, there are five national commodity exchanges and several regional exchanges in India. The growth in trading volumes has been primarily propelled by Multi Commodity Exchange (MCX) and National Commodity Exchange (NCDEX). These two exchanges account for a large share of the total number of contracts traded on all the exchanges in India. Following the sharp surge in turnover and trade volumes in recent years, the stakes in commodity trading are higher than ever before. Investment and trading in commodities is now considered a good alternative investment in the country.

GROWTH IN THE COMMODITY MARKET:


The Indian commodity futures volumes have grown 5.5 times from Rs.20.53 trillion in 2005-06 to Rs.112.52 trillion in 2010-11. Currently, the average monthly volume on the Indian commodity exchanges is Rs.6 trillion. MCX leads the industry, followed by NCDEX. MCX is not only number one in India but has achieved some global milestones too (sources: MCX). It was the largest exchange in silver (in terms of number of futures contracts traded in 2010), number two in

gold, copper and natural gas and number three in crude oil. When we say India is the largest exchange in silver, it is a great achievement for the Multi Commodity Exchange. Talking about agricultural commodities, the Indian commodities market has futures contracts of commodities such as black pepper, cumin seed, mentha oil and many more which are internationally traded but only listed in India; internationally traders tend to consider these as benchmark rates. For example, exporters from Vietnam, the largest producer of black pepper, are keeping a close watch on Indian pepper futures. Slowly but steadily the Indian commodity market is laying a strong foundation for a takeoff in the near future.

Though it is at a nascent stage, the volumes in the Indian commodities market have a different story to tell. From Rs.20 trillion, the volumes have reached Rs.112.52 trillion in FY10-11. When we see this kind of a spurt in volumes, we must remember that it has primarily been a futures market, without Options. Foreign institutional investors, domestic institutions, banks and insurance companies are not allowed to trade on the Indian commodity bourses and a majority of volumes come from jobbers, arbitrageurs, retail traders and small scale enterprises and corporates (for hedging). Even portfolio management services are not permitted.

There is a long awaited amendment in the Forward Commission Regulation Act 1952 (FCRA), which will strengthen the regulator, Forward Markets Commission and enable it to introduce new products like Options, index trading and open up the market for new participants, which will help achieve the next phase of growth. Globally, commodity derivatives volumes are 35x-40x of the physical market but in India it is just 4x. As the number of participants is increasing by the day and the overall interest in commodity futures market among traders and investors is increasing rapidly, the growth potential of this market is immense. We expect the Indian commodity futures market to reach at least 15x-20x by FY15. With the contribution of Indian physical commodities to GDP being pegged at 45%, even if the commodity futures market trades at 15x - 20x, we can imagine the kind of volumes our exchanges will generate. Also, the regulatory bodies are yet to decide on allowing domestic institutions to trade in commodity futures and plans are a foot to introduce Options trading on our bourses. If these measures are adopted in the near future, even a 30x volume by FY15 over the physical market will not be surprising.

REASONS FOR GROWTH OF COMMODITIES VOLUMES


Commodities are an asset class which is cyclical and tradable by nature. In the western world, the volumes of the commodities market are almost two to three times as compared to the equity market. Commodities is a volume game, you rarely see prices shooting up by 20%-30% in a single day, which is common in the equity markets. So, to make huge profits, one should have a high leverage to make the most of the 3%-4% movements which take place throughout the day. Apart from other reasons that were witnessed around the globe post the 2008 recession, we have seen easy monetary policies being adopted by western central bankers and beyond that any

slowdown or fear of a slowdown was tackled by stimulus packages. A massive debasement of currencies is taking place since the past three years and that is one of the prime reasons investors have found refuge in hard assets and commodities. It is not just shortages that are fuelling the bull run in commodities. The introduction of exchange traded funds internationally in commodities, pension funds, sovereign funds as well as central bankers (in case of gold), who are increasing the exposure in commodities, are responsible in a very significant way for the spike that we have seen in commodity volumes. Slowing growth in developed nations and high inflationary expectations in emerging markets have also benefited commodities. Investors have found a store of value in commodities. The intrinsic value of commodities in comparison with other asset classes is very high. There is a secular bull run in the complex since the past decade. However, the year 2008 was an exception. The rise in inflation is not just because of the spike in the prices of industrial commodities. In fact, the rising inflation in China was mainly attributed to rising pork prices. Despite the drop in crude oil prices, the biggest worries for Asia continue to be rising food prices, weather concerns, depleting carry forward stocks and growing demand, making a perfect case of a bull run in agro commodities. There is increasing awareness about commodities among people and more and more people can be seen parking their money in agricultural commodities like soybean and corn, thus adding to the volumes on the exchange.

FUTURE OF INDIAN COMMODITIES: SPOT EXCHANGES


Futures markets are speculative by nature and without a product, which caters to investors, the growth of this industry would be incomplete. The concept of a national level spot exchange was pioneered by Financial Technologies in 2005.

Financial Technologies, in a joint venture with NAFED (a government agency engaged in food procurement/storage), set up the countrys first spot exchange National Spot Exchange Ltd (NSEL). In order to stay invested in commodities, investors had to rollover their positions during the expiry of the futures contract which involves cost. More than that, the futures market is subject to speculation, which can upset investors as they are required to pay huge mark-to-mark losses. Therefore, to attract more and more investors there is an urgent need for reforms to be introduced which will enable these spot markets to function efficiently. The physical agri market in the country has been in a sorry state due to inefficiencies and strict regulations. Electronic spot exchanges at the national level are playing a major role in attracting investors and farmers on to the electronic platform as it is the future of the Indian spot market. These exchanges are still in the nascent phase and the potential is enormous. Since the second half of 2010, volume of instruments like e-gold and e-silver, which are offered by NSEL have picked up and since then we have seen the launch of more such instruments like e-copper and e-zinc, among others. This has attracted investors and the awareness programmes have resulted in a spike in volumes of this exchange, which is an encouraging sign for the future of the market.

India is a world leader as far as the production of agricultural commodities is concerned. There is a need to promote more and more agro commodities on the electronic platform so that participants on the futures platform get an effective benchmark. Changes in the warehousing act and the implementation of the goods and services (GST) act will enable spot exchanges to list more and more commodities on the Indian platform. Spot exchanges, like other exchange systems, provide counter-party assurance in respect of all trades executed on its platform. In case the buyer/seller defaults, the exchange makes the payment from its own Settlement Guarantee Fund and subsequently recovers money from the defaulters deposit. Thus, the payment is fully secured. With physical delivery taking place, counter party default risk covered participants will have a good and a transparent trading platform. When we combine the volumes of all futures exchanges and spot exchanges, we find that the Indian commodities market is gearing itself for the next phase of growth. Further, the amendment in several Acts will augment growth and prepare it for the big leap. We believe that in the coming two years, the cumulative volume on the Indian commodities exchanges would be somewhere between 1,10,000 and 1,30,000 crore per day. Retail traders and investors should take advantage by being a part of this story. They should diversify at least 15% to 20% of their total portfolio in commodities.

Derivative Market Introduction


Derivatives are the financial contracts whose values/prices are dependent on the behavior of price of one or more basic underlying assets. The underlying assets are Interest rate, Commodity prices etc. The derivative market will broadly classified into two main categories, they are

Fig: Classification of Derivative Market

OTC Equity Derivatives


Traditionally equity derivatives have a long history in India in the OTC market. Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets were traded as early as 1900 in Mumbai

Derivative Markets today

The prohibition on options in SCRA was removed in 1995. Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI. The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products. Besides the Forward market in currencies has been a vibrant market in India for several decades. In addition the Forward Markets Commission has allowed the setting up of commodities futures exchanges. Today we have 18 commodities exchanges most of which trade futures. e.g. The Indian Pepper and Spice Traders Association (IPSTA) and the Coffee Owners Futures Exchange of India (COFEI).

In 2000 an amendment to the SCRA expanded the definition of securities to included Derivatives thereby enabling stock exchanges to trade derivative products. The year 2000 will herald the introduction of exchange traded equity derivatives in India for the first time.

Equity Derivatives Exchanges in India

In the equity markets both the National Stock Exchange of India Ltd. (NSE) and The Stock Exchange, Mumbai (BSE) has applied to SEBI for setting up their derivatives segments.

BSE's and NSEs plans

Both the exchanges have set-up an in-house segment instead of setting up a separate exchange for derivatives. BSEs Derivatives Segment will start with SENSEX futures as its first product. NSEs Futures & Options Segment will be launched with Nifty futures as the first product.

Product Specifications BSE-30 SENSEX Futures


Contract Size - Rs. 50 times the Index Tick Size - 0.1 points or Rs. 5 Expiry day - last Thursday of the month Settlement basis - cash settled Contract cycle - 3 months Active contracts - 3 nearest months

Product Specifications S&P CNX Nifty Futures


Contract Size - Rs. 200 times the Index Tick Size - 0.05 points or Rs. 10 Expiry day - last Thursday of the month Settlement basis - cash settled Contract cycle - 3 months Active contracts - 3 nearest months

Based on the underlying assets, derivative market is for, 1. Finance Market (foreign exchange)

2. Commodity Market 3. Index Derivative

Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use.

CAPITAL MARKET
Capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Since 2003, Indian capital markets have been receiving global attention, especially from sound investors, due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid integration with the world economy increased Indias global competitiveness. No wonder, the global ratings agencies Moodys and Fitch have awarded India with investment grade ratings, indicating comparatively lower sovereign risks. The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was established in 1992 to protect investors and improve the microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress was made in further strengthening and streamlining risk management, market regulation, and supervision. The securities market is divided into two interdependent segments:

The primary market provides the channel for creation of funds through issuance of new securities by companies, governments, or public institutions. In the case of new stock issue, the sale is known as Initial Public Offering (IPO).

The secondary market is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in terms of:

The products traded in the market, viz. equities and bonds issued by the government and companies, futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and futures on interest rate products such as Notional 91-Day T-Bills, 10Year Notional Zero Coupon Bond, and 6% Notional 10-Year Bond.

The amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population.

The profiles of the investors, issuers, and intermediaries.

. Role of Capital Markets


Mobilization of Savings Promotion of Industrial Growth Ready & Continuous Markets Raising of long term Capital

Functions of a capital market


Enable quick valuation of financial instruments Provide insurance against market risk or price risk Enable wider participation Provide operational efficiency through
simplified transaction procedure

lowering settlement timings lowering transaction costs

CAPITAL MARKET REFORMS IN INDIA The 1990s- emergence of thesecurities market as a major source of finance for trade andindustry in India A growing number of companies have been accessing the securities market rather than depending on loans from financial institution/banks. JULY 31,2005
22 Stock Exchanges Over 10,000 Electronic Terminals at over 400 locations all over India. 9108 Stock Brokers and 14582 Sub brokers 9644 Listed Companies 22 Depositories and 483 Depository Participants. 128 Merchant Bankers, 59 Underwritersitories and 483 D 4 Credit Rating Agenciesepository Participants

STOCK EXCHANGES IN INDIA

Impact Of Capital Market On Indian Economy


Long term finance for corporate and government: The capital market is the market for securities, where companies and governments can raise long term funds. Selling stock and selling bonds are two ways to generate capital and long term funds. It provides a new avenue to corporate and government to raise funds for long term. Helps to bridge investment savings gap: Capital market expand the investment options available in the country, which attracts portfolio investments from abroad. Domestic savings are also facilitated by the availability of additional investment options. This enables to bridge the gap between investment and savings and paves the way for economic development. Cost effective mode of raising finance : Capital market in any country provides the corporate and government to raise long term finance at a low cost as compared to other modes of raising finance Therefore capital market is important, more so for India as it embarks on the path of becoming a developed country.

Provides an avenue for investors to park their surplus funds: Capital market provides the investors both domestic as well as foreign, various instruments to invest their surplus funds. Not only it provides an avenue to park surplus funds but it also helps the investors to reap decent rewards on their investment. This realization has resulted in increased investments in capital market both from domestic as well as foreign investors in Indian capital market. Conducive to implementation of Monetary Policy: since RBI controls the movement and availability of money in the economy. When RBI follows the expansionary policy it purchases government securities from the bond market and sells the same in the in the secondary market. This process has some effect on the interest rates. Thus capital market helps RBI in applying the monetary policy. Indicates the state of the economy: Capital market is said to be the face of the economy. This is so because when capital market is stable, investments flow into capital market from within as well as outside the country, which indicates that the future prospects of the economy are good

BOND MARKET

The bond market (also known as the credit, or fixed income market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures

References to the "bond market" usually refer to the government bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates. Because of the

inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. The yield curve is the measure of "cost of funding".

Bond market participants


Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. Participants include:

Institutional investors Governments Traders Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals. Viarables that Effect Value Maturity Redemption Features Credit Quality Interest Rate Price Yield Tax Status

MATURITY

1. Short-term notes: maturities of up to 4 years; 2 .Medium-term notes/bonds: maturities of five to 12 years; 3. Long-term bonds: maturities of 12 or more years. REDEMPTION FEATURES Bond with a redemption provision usually have higher return to compensate for the risk that the bonds might be called early. CALL Option: provisions that allow or require the issuer to repay the investors principal at a specified date before maturity. PUT Option: option of requiring the issuer to repurchase the bonds, at a specified time, prior to maturity CREDIT QUALITY Each of the agencies assigns its ratings based on an in-depth analysis of the issuer's financial condition and management, economic and debt characteristics, and the specific revenue sources securing the bond

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P e r im Ec let xe n l U eM i m p r eu p d L wrM iu oe e m d Seu t e pc l iv a Vr Seu t e ey pc l iv a Df u e l at

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AA A A A A BB B B B BCCC , C, C D

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AA A A A A BB B B B BCCC, C , C, C DDD,D D, D

INTEREST RATES FIXED: Stays same until maturity; ie: buy a $1000 bond with 8% fixed interest rate and you will receive $80 every year until maturity and at maturity you will receive the $1000 back. FLOATING: adjustable to prevailing market rates. PAYABLE AT MATURITY: receive no payments until maturity and at that time you receive principal plus the total interest earned compounded semi-annually at the initial interest rate. PRICE The amount you pay for the bond Newly issued bonds will pay close to their face-value Traded bonds fluctuate in response to changing interest rates Bonds traded higher than their face-value are said to be sold at a premium Bonds traded lower than their face-value are said to be be sold at discount YIELD Yield is the return you actually earn on the bond--based on the price you paid and the interest payment you receive. Two Types of Yields: Current Yield: annual return on the dollar amount paid for the bond and is derived by dividing the bond's interest payment by its purchase price Yield To Maturity: total return you will receive by holding the bond until it matures or is called. . TAXABLE STATUS

Some bonds offer special tax advantages There is no state or local income tax on the interest from U.S. Treasury bonds, and no federal income tax on the interest from most municipal bonds, and in many cases no state or local income tax, as well.

Indian Insurance Industry: Market Share State-owned Life Insurance Corporation (LIC) of India held a market share of around 76 per cent in terms of new business premium for the financial year up to August 2011 while the remaining was divided among 23 private insurance companies. LIC has been continuously increasing its market share on the back of its strong base of conventional products, which remained unaffected by the change in regulations, and its group retirement plans. Indian Insurance Industry: Recent Statistics Data released by the Insurance Regulatory and Development Authority (IRDA) indicates that the life insurance industry collected Rs 49,064 crore (US$ 10 billion) in the first six months of 201112 while the non-life insurance industry posted a 26 per cent year-on-year (y-o-y) growth in gross written premium during the same period. According to the data by IRDA, the non-life insurance industry gathered a total premium of Rs 28,604 crore (US$ 5.82 billion) during April-September 2011-12 as against Rs 22,744 crore (US$ 4.63 billion) in the corresponding period last year. The four state-run insurers - New India Assurance, United India, National India and Oriental India - witnessed an increase of 25 per cent while private sector companies registered a growth of 27 per cent in premium. During the April-August 2011, the life insurance industry in India collected premiums worth Rs 71,565.49 crore (US$ 14.57 billion) by writing new policies. While LIC collected Rs 30,912.31 crore (US$ 6.29 billion), private insurers collected Rs 9,740.87 crore (US$ 1.98 billion). In August itself, the total premium collection by the industry was Rs 13,857.89 crore (US$ 2.82 billion), 62 per cent higher than Rs 8,511.25 crore (US$ 1.73 billion) collected in July. For the general insurance industry, collections stood at Rs 23,712.75 crore (US$ 4.83 billion) by writing new policies during the April-July 2011-12, compared with Rs 19,144.06 crore (US$ 3.89

billion) collected last year. While private insurers registered a growth of 25.97 per cent at Rs 9,861.28 crore (US$ 2 billion), the four state-owned general insurance companies' collection was higher by 22.74 per cent at Rs 13,851.47 crore (US$ 2.82 billion). Recent Developments

Warren Buffets Berkshire Hathaway ventured into Indian general insurance industry in

March 2011 and is now ready to launch an online term cover to foray into the life insurance segment. Berkshire India, a joint venture (JV) between Nebraska-based Berkshire Hathaway and Allianz, is mushrooming at a fast pace and would also launch a health insurance product soon.

Edelweiss Tokio Life Insurance Company Ltd (ETLICL) - a 74:26 JV company between

Edelweiss Financial Services Ltd and Japanese insurance major Tokio Marine Holdings has massive expansion plans on cards. The company is planning to open 33 new branches at selected locations across India, including 14 in Maharashtra, by December 2012.

With an aim to strengthen its distribution network and reach out to the rural masses across

India, Max Bupa Health Insurance Company Ltd is in talks with regional rural banks, cooperative banks and post offices to distribute its health insurance products. The company, majorly relying on the model of bancassurance, is in talks with IRDA for the same.

IRDA has given its nod to Videocon Group's general insurance JV with the US-based

Liberty Mutual Group. Liberty Mutual, with 26 per cent stake in the JV initially, will have an option to increase its stake if regulations permit.

State of Insurance in India According to latest IRDA figures, India has about 57 crore of insurable people. Out of which Private Life Insurance companies have 4.03 crore Policies in force which cover about 4.20 crore lives [upto 31st March 2010]. Here are some of the highlights released by IRDA:

The insurance penetration has increased from 2.32% to 5.51% over the period 2000 to 2010. The number of insurance offices has increased from 2,199 in 2000 to 12,018 in 2010. From the single channel system of tied agents which was predominant before opening up of the sector in 2000, multiple channels of distribution comprising brokers, bank assurance, corporate agents emerged accounting for nearly 21 percent of all new business in the year 2009-10. The first year life insurance premium grew from Rs.19,857.28 crore in 2001-02 to Rs.1,09,894.02 crore in 2009-10. The total life insurance premium rose from Rs. 50,094.46 crore in 2001-02 to Rs. 2,65,450.37 crore in 2009-10.

Growth and development of insurance market in India


Number of Public & Private Sector Insurance Companies in India

Life Insurers (As on 20.06.2011) Public Sector:

Non-Life Insurers(As on 05.08.2011) Public Sector: 1. National Insurance Co. Ltd

1. Life Insurance Corporation of India

2. The New India Assurance Co. Ltd 3. The Oriental Insurance Co. Ltd 4. United India Insurance Co. Ltd.

Private Sector: 1. Ltd 2. Birla Sun Life Insurance Company Ltd 3. HDFC Standard Life Insurance Company Ltd 4. ICICI Prudential Life Insurance Company Ltd 5. ING Vysa Life Insurance Company Ltd 6. Max New York Life Insurance Co Ltd 7. Met Life Insurance Company Ltd Bajaj Allianz Life Insurance Company

Private Sector: 1. Bajaj Allianz General Insurance Co. Ltd

2. ICICI Lombard General Insurance Co Ltd

3. IFFCO Tokio General Insurance Co. Ltd

4. Reliance General Insurance Co. Ltd

5. Royal Sundaram Alliance Insurance Co. Ltd

6. Tata AIG General Insurance Co. Ltd 7. Cholamandalam MS General Insurance Co. Ltd

8. Kotak Mahindra Old Mutual Life 8. HDFC ERGO General Insurance Co. Ltd

Insurance Company Ltd 9. SBI Life Insurance Co Ltd 10. Tata AIG LIFE Insurance Co. Ltd 9. Export Credit Guarantee Corporation of India Ltd 10. Agriculture Insurance Co. Ltd

11. Reliance Life Insurance Co Limited 11. Star Health Insurance Co. Ltd 12. Aviva Life Insurance Co Ltd 12. Apollo Munich Health Insurance Co. Ltd

13. Sahara India Life Insurance Co. Ltd 13. Future Generalli India Insurance Co. Ltd 14. Shriram Life Insurance Co. Ltd 15. Bharti AXA Life Insurance 14. Universal Sompo General Insurance Co. Ltd 15. Shriram General Insurance Co Ltd

Company Ltd 16. Future Generali India

Life 16. Bharti AXA General Insurance Company Limited 17. Raheja QBE General Insurance Company Limited 18. SBI General Insurance Co. Ltd

InsuranceCo.Ltd 17. IDBI Federal Life Insurance Co. Ltd 18. Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd 19. AEGON Religare Life Insurance Co. Ltd 20. DLF Paramica Life Insurance Co. Ltd 21. Star Union Dia-ichi Life Insurance Co. Ltd 22. India First Life Inasurance Co. Ltd. 23. Edelweiss Tokio Life Insurance Co. Ltd.

19. Max Bupa Health Insurance Co. Ltd

20. L&T General Insurance Co. Ltd

Re-Insurer: 1. General Insurance Corporation of India

Challenges for the Indian Insurance market


Challenges to private sector players to differentiate themselves In many industries opening of the sector to private participation has weakened the market position of the incumbent, making it easier for the new entrants to grow and prosper. However, in Indian insurance sector, the incumbent continues to dominate even 10 years after the opening-up of the sector. This puts the onus on the private sector players to differentiate themselves in terms of product innovation and customer servicing, so that they could grab a bigger share of the Indian insurance pie. Challenge of fulfilling the need of customer As insurance is a 'push' rather than a 'pull' product, it is a big challenge for the companies to make their products meaningful to prospective customers. As a first step, companies should simplify and de-jargonize insurance products and design the benefits so as to suit the specific needs of policyholders, suggested the panel. A higher degree of transparency on policy terms will ensure that the customer understands the product and its benefits, minimizing fears of being cheated. It is therefore important for the industry to invest not just in expansion and distribution but also in client servicing and processing, the panel pointed out. Complexity involved in Settlement of Claim In general insurance, for instance, many customers are discouraged from buying insurance due to the anticipated complexity involved in settlement of claims. Insurance companies do assert that the competition in the industry is forcing them to speed up their claim processes, but the fact remains that a lot more needs to be done to make general insurance a hassle-free experience for the customers, noted the panel. While it is easy to make tall claims about the need to make investments and infuse capital to meet the challenges, one cannot ignore the fact that profitability is the major concern of this industry today. Given aggressive expansion plans of the private players and the need to beat the

competition, the period to break-even in life-insurance business has risen from what was estimated at 9-10 years to about 13-15 years now, the panel pointed out. The industry, which is already reeling under the pressure of high upfront cost of a nationwide expansion, is now also facing the problem of dwindling volumes as policy lapses are increasing every year. In a price-sensitive market like India, growing competition has plummeted the premium rates to making it imperative for the insurance companies to work on razor-thin expenses ratios.

References http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2 http://www.ibef.org/industry/insurance_industry.aspx http://articles.economictimes.indiatimes.com www.indianetzone.com www.exim.indiamart.com http://www.isb.edu http://www.articlesnatch.com/Article/Scope-Of-Forex-Market-In-India/325688 http://forexpdf.info/2011/01/what-is-foreign-exchange-market-who-are-its-participants-whatare-its-functions-pdf-forex/ MAGAZINES: Indian stock market guide Outlook Money Money Today Money Life Business Today Business India Outlook Business Business World Business & Economy

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