Financial System Coordination

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.

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.