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Questions and Answers
What is one way to counter endowment risks in financial markets?
What is one way to counter endowment risks in financial markets?
Rate-of-return risk cannot be reduced through portfolio diversification.
Rate-of-return risk cannot be reduced through portfolio diversification.
False
What effect does a fall in the saving rate have on growth rate in an endogenous growth model?
What effect does a fall in the saving rate have on growth rate in an endogenous growth model?
It lowers the growth rate.
What year was the Securities and Exchange Board of India (SEBI) established?
What year was the Securities and Exchange Board of India (SEBI) established?
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The contribution of financial markets is essential for maintaining the __________ of an economy.
The contribution of financial markets is essential for maintaining the __________ of an economy.
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SEBI is solely responsible for regulating stock exchanges in India.
SEBI is solely responsible for regulating stock exchanges in India.
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Match the following terms related to financial markets with their descriptions:
Match the following terms related to financial markets with their descriptions:
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What are the three groups that constitute the securities market according to SEBI?
What are the three groups that constitute the securities market according to SEBI?
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SEBI was given statutory powers through the SEBI Act in the year _____ .
SEBI was given statutory powers through the SEBI Act in the year _____ .
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Which factor is responsible for the integration of Indian financial markets with global markets?
Which factor is responsible for the integration of Indian financial markets with global markets?
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Match the following roles of SEBI with their descriptions:
Match the following roles of SEBI with their descriptions:
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Deregulation has no impact on the rise of national stock markets.
Deregulation has no impact on the rise of national stock markets.
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What is one of SEBI's regulatory functions?
What is one of SEBI's regulatory functions?
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What is a common reason companies are shifting from debt to equity finance?
What is a common reason companies are shifting from debt to equity finance?
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One of SEBI’s roles is to promote insider trading to ensure market efficiency.
One of SEBI’s roles is to promote insider trading to ensure market efficiency.
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What is the primary effect of well-developed financial markets on an economy?
What is the primary effect of well-developed financial markets on an economy?
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List one way SEBI promotes developmental activities in the securities market.
List one way SEBI promotes developmental activities in the securities market.
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A well-developed financial market encourages savings to flow into physical assets rather than financial assets.
A well-developed financial market encourages savings to flow into physical assets rather than financial assets.
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Which stock exchange is recognized as the largest in the world based on the number of companies listed?
Which stock exchange is recognized as the largest in the world based on the number of companies listed?
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Name one way financial development can affect the saving rates.
Name one way financial development can affect the saving rates.
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The Japanese market has a strong influence on the Indian market.
The Japanese market has a strong influence on the Indian market.
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The financial market provides the base for the continuous reorganization of the economy which is needed to support _____ .
The financial market provides the base for the continuous reorganization of the economy which is needed to support _____ .
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Match the following financial effects with their descriptions:
Match the following financial effects with their descriptions:
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What percentage of total portfolio capital inflows to emerging market economies does India represent?
What percentage of total portfolio capital inflows to emerging market economies does India represent?
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Foreign capital flows have made a crucial contribution to the growth of India’s _____ market.
Foreign capital flows have made a crucial contribution to the growth of India’s _____ market.
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In which type of sectors is investment more likely to be allocated in countries with developed financial markets?
In which type of sectors is investment more likely to be allocated in countries with developed financial markets?
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Financial development can lead to an increase in saving rates in households.
Financial development can lead to an increase in saving rates in households.
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Match the following parties actively engaged in financial markets:
Match the following parties actively engaged in financial markets:
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What is one consequence of a flow of liquidity into physical assets like gold and real estate?
What is one consequence of a flow of liquidity into physical assets like gold and real estate?
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Which of the following countries do Indian companies primarily list on apart from India?
Which of the following countries do Indian companies primarily list on apart from India?
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The integration of Indian financial markets with global markets began in the early 1980s.
The integration of Indian financial markets with global markets began in the early 1980s.
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Name one major regional market in Asia that influences India’s market.
Name one major regional market in Asia that influences India’s market.
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What is one of the key functions of the Reserve Bank of India (RBI) related to currency?
What is one of the key functions of the Reserve Bank of India (RBI) related to currency?
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The Securities and Exchange Board of India (SEBI) was established as a statutory body in 1988.
The Securities and Exchange Board of India (SEBI) was established as a statutory body in 1988.
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What is the primary role of RBI as a credit controller?
What is the primary role of RBI as a credit controller?
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The Reserve Bank of India acts as the sole currency authority for the issue of bank notes under section ______ of the RBI act.
The Reserve Bank of India acts as the sole currency authority for the issue of bank notes under section ______ of the RBI act.
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Match the following functions with their descriptions:
Match the following functions with their descriptions:
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Which sector is NOT mentioned as a target for directing bank credit?
Which sector is NOT mentioned as a target for directing bank credit?
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The government of India deposits all its cash balances with RBI free of interest.
The government of India deposits all its cash balances with RBI free of interest.
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When was SEBI first established?
When was SEBI first established?
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Study Notes
Financial Markets and the Economy
- A well-developed financial market contributes to a healthy and efficient economy.
- Financial markets are crucial for efficiently funneling savings to firms, improving capital allocation, and affecting saving rates.
- A thriving financial market encourages savings to be invested in financial assets, aiding economic growth and reducing inflation.
- Financial institutions facilitate the continuous reorganization of the economy to support growth.
- Financial markets enable risk sharing for households, including endowment risks (like health hazards) and rate-of-return risks (like stock market volatility).
- Financial markets provide a mechanism for households to save and for those who need it to borrow through consumer credit and mortgage loans.
- Market-based financing is beneficial for industries experiencing technological advancements and rapid change, supporting competitiveness in a globalized economy.
Integration of Indian Financial Markets
- Globalisation, deregulation, and technological advancements have led to increased integration of national stock markets.
- Cross-border mobility of private capital inflows is a key driver of financial integration, fueled by investors seeking portfolio diversification and better returns.
- Financial integration brings benefits, such as market and institutional development leading to efficient price discovery, higher savings, increased investment, and economic progress.
- Risks associated with financial integration include contagion effects, potentially disrupting economic activities.
- The Bombay Stock Exchange (BSE) has emerged as the largest stock exchange globally in terms of listed companies.
- Many Indian companies have expanded their listing to global markets, notably in the United States and United Kingdom, attracting foreign capital.
- Foreign institutional investors play a significant role in India's stock market, with a growing presence in the equity market compared to the debt market.
- The Singapore and Hong Kong markets have a considerable influence on the Indian market within Asia, while the Japanese market's impact is relatively weak.
- Co-integrated stock markets contribute to financial stability by preventing significant deviations from the long-run equilibrium path.
Key Players in Financial Markets
- Individuals: Participate as investors, borrowers, and savers.
- Firms: Raise capital through the issuance of equity and debt, borrow for investments, and manage their financial resources.
- Corporates: Seek financing for expansion and growth, invest, and manage their financial operations.
- Banks: Facilitate borrowing and lending, manage deposits, and offer financial products.
- Regulators: Ensure fair and transparent market practices and protect investor interests.
- Government: Plays a role in shaping economic policies, managing public debt, and regulating financial institutions.
Functions of the Reserve Bank of India (RBI)
- Credit Controller: Controls the supply of credit in line with the government's economic priorities.
- Manager of Exchange Control: Develops and regulates the foreign exchange market, promoting orderly growth and integration with global markets.
- Issuer of Currency: Sole authority for issuing banknotes, managing the supply of currency, and ensuring its security.
- Banker to the Government: Manages public debt, handles government accounts, and represents India in international financial institutions.
Role of the Securities and Exchange Board of India (SEBI)
- Regulatory: Regulates stock exchanges, brokers, intermediaries, and collective investment schemes. Prohibits fraudulent and unfair practices, insider trading, and significant share acquisitions.
- Developmental: Promotes investor education, financial awareness, self-regulatory organizations, training for market intermediaries, fair practices, and research to support market participants.
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Description
This quiz focuses on the critical role of the financial system in coordinating savings and investments. You will be asked to comment on how these components interact and influence each other. Prepare for a brief answer that encapsulates these relationships effectively.
