Government Policy and Indian Financial Evolution
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Questions and Answers

What was a significant feature of the Indian Financial System pre-independence?

  • Absence of organized banking institutions (correct)
  • Open economic strategies
  • High availability of credit
  • Comprehensive foreign investment

    • Which event marked a significant change in the Indian Financial System after 1951?

  • Deregulation of interest rates
  • Introduction of foreign investments
  • Nationalization of RBI and SBI (correct)
  • Establishment of stock exchanges

    • What characterized the Indian Financial System during the post-independence era up to the 1990s?

  • Complete foreign ownership of banks
  • Reduction in government intervention
  • Increase in public sector institutions (correct)
  • Shift from public to private ownership

    • Which major change occurred in the banking sector in 1969?

    <p>Nationalization of 14 commercial banks</p> Signup and view all the answers

    What was a feature of India's financial system prior to 1951?

    <p>Closed economy with restricted foreign savings</p> Signup and view all the answers

    What was the primary goal of the government policies in stabilizing the economy?

    <p>Regulating interest rates and unemployment</p> Signup and view all the answers

    What change in the banking sector occurred with the nationalization of banks?

    <p>Direct control of government over commercial banks</p> Signup and view all the answers

    Which of the following is NOT a characteristic of the Indian Financial System post-independence until the 1990s?

    <p>Dominance of private financial institutions</p> Signup and view all the answers

    What is the primary market primarily concerned with?

    <p>Collecting long-term capital through new issues</p> Signup and view all the answers

    What is one of the methods of raising capital in the primary market?

    <p>Public Issue</p> Signup and view all the answers

    What distinguishes the secondary market from the primary market?

    <p>It deals with previously-issued securities</p> Signup and view all the answers

    Which act replaced the Foreign Exchange Regulation Act (FERA) of 1973?

    <p>Foreign Exchange Management Act (FEMA)</p> Signup and view all the answers

    Which of the following is an example of a secondary market?

    <p>New York Stock Exchange (NYSE)</p> Signup and view all the answers

    What is one role of the capital market?

    <p>Raising capital for businesses</p> Signup and view all the answers

    Who are allowed to participate in the rupee foreign currency swap market?

    <p>Newer players under certain limitations</p> Signup and view all the answers

    What characterizes the secondary market?

    <p>It facilitates trading of existing securities</p> Signup and view all the answers

    What type of financial instrument is a stock certificate considered?

    <p>Cash instrument</p> Signup and view all the answers

    Which financial instrument gives a holder the obligation to buy or sell an underlying asset in the future?

    <p>Forward contract</p> Signup and view all the answers

    What type of instrument is a futures contract categorized as?

    <p>Derivative instrument</p> Signup and view all the answers

    What financial instrument is defined by an agreement to exchange periodic payments between two parties?

    <p>Swap</p> Signup and view all the answers

    Which of the following is NOT a type of derivative instrument?

    <p>Deposits</p> Signup and view all the answers

    What is the primary nature of foreign exchange instruments?

    <p>They primarily consist of currency agreements.</p> Signup and view all the answers

    Which type of cash instrument directly correlates to market conditions?

    <p>Securities</p> Signup and view all the answers

    In what way do derivatives differ from cash instruments?

    <p>Derivatives are based on underlying assets.</p> Signup and view all the answers

    What is a common method of determining asset management fees?

    <p>hourly rates, flat-rate, or percentage of AUM</p> Signup and view all the answers

    What service do wealth management firms primarily provide?

    <p>Comprehensive financial services</p> Signup and view all the answers

    What type of fees do insurance brokers typically earn?

    <p>Commissions from insurance companies</p> Signup and view all the answers

    What is a primary objective of financial regulators?

    <p>To promote transparency, stability, and efficiency in the financial sector</p> Signup and view all the answers

    Which feature is crucial for the credibility of financial regulators?

    <p>Independence from political influence</p> Signup and view all the answers

    What is included in the services provided by consulting and advisory firms?

    <p>Specialized financial advice in areas like mergers and acquisitions</p> Signup and view all the answers

    What is a primary responsibility of financial regulators regarding consumers?

    <p>Protect consumers from unfair practices and fraud</p> Signup and view all the answers

    Which of the following is NOT a service offered by wealth management firms?

    <p>Insurance brokerage</p> Signup and view all the answers

    What is a public sector bank?

    <p>A bank where the majority stakes are owned by the government</p> Signup and view all the answers

    Which of the following is true for private sector banks?

    <p>Majority stakes are owned by private organizations or individuals.</p> Signup and view all the answers

    What is a characteristic of foreign banks operating in India?

    <p>They offer competition and improve banking services.</p> Signup and view all the answers

    Regional Rural Banks (RRB) primarily focus on which sector?

    <p>Agriculture and rural sector credit</p> Signup and view all the answers

    What is the purpose of the Small Industries Development Bank of India (SIDBI)?

    <p>To provide financial assistance to small industries</p> Signup and view all the answers

    Which institution does NOT possess a full banking license?

    <p>Nonbanking financial institutions (NBFIs)</p> Signup and view all the answers

    What is the primary function of stock exchanges?

    <p>To connect companies with investors for funding</p> Signup and view all the answers

    What do insurance companies primarily offer to their customers?

    <p>Various insurance policies for financial protection</p> Signup and view all the answers

    Study Notes

    Government Policy and Risk Management

    • Investors can hedge against or minimize risks associated with various financial instruments.
    • Governments implement policies targeting stabilization of the economy, addressing inflation, unemployment, and interest rates.
    • Central banks reduce Cash Reserve Ratio (CRR) and lower interest rates to enhance credit availability for businesses.

    Evolution of the Indian Financial System

    • The Indian financial system evolved through three distinct phases: Pre-Independence (up to 1951), Post-Independence (1951-1990), and Post-1991.

    Phase I: Pre-Independence (up to 1951)

    • Characterized by a traditional economy with a semi-organized securities market.
    • Featured a closed circle of industrial entrepreneurship and restricted access to foreign savings.
    • Absence of long-term financing institutions for industries.

    Phase II: Post-Independence (1951-1990)

    • Significant growth in the financial system marked by the nationalization of banks and the insurance sector.
    • Key events included:
      • Nationalization of Reserve Bank of India (RBI) and State Bank of India (SBI) in 1956.
      • Government's control over 14 major commercial banks in 1969.
      • Nationalization of Life Insurance Corporation (LIC) and General Insurance Corporation (GIC).

    Development of Financial Institutions

    • Establishment of various public sector institutions to meet industrial financial needs.
    • Introduction of foreign currency swaps for newer players in currency markets.
    • Transition from Foreign Exchange Regulation Act (FERA) of 1973 to Foreign Exchange Management Act (FEMA) of 1999 to promote freedom in exchange markets.
    • Allowance for foreign institutional investors and non-resident Indians to trade derivatives.

    Capital Markets: Overview

    • Capital markets facilitate trading in investment instruments like bonds and equities, connecting investors with excess funds to those in need of capital.
    • Comprises two segments: primary market and secondary market.

    Primary Market

    • Involved in the initial sale of shares and securities to raise long-term capital.
    • Companies issue securities directly to investors, who receive new security certificates.
    • Key methods for raising capital include public issues, offers for sale, private placements, rights issues, and electronic IPOs.

    Secondary Market

    • Facilitates trading of existing securities among investors after their initial sale in the primary market.
    • Examples of secondary markets include the NYSE, LSE, and BSE.
    • Companies do not participate in transactions in the secondary market.

    Importance of Capital Markets

    • Vital for businesses needing capital for new projects or expansion.
    • Essential for the functioning of both public and private sector banks.

    Types of Banks

    • Public Sector Banks: Majority stakes owned by the government.
    • Private Sector Banks: Majority owned by private organizations or individuals.
    • Foreign Banks: Headquartered outside India but operate within the country.
    • Regional Rural Banks (RRBs): Focus on providing concessional credit for agricultural and rural sectors, formed as joint ventures with government support.
    • Specialized Banks: Target specific sectors, including SIDBI for small industries, EXIM Bank for international trade, and NABARD for rural and agricultural development.

    Non-Banking Financial Institutions (NBFIs)

    • NBFIs do not hold full banking licenses; they offer alternative financial services such as investment and risk pooling.

    Financial Instruments

    • Cash Instruments: Easily transferable and influenced by market conditions, including securities and loans.
    • Derivative Instruments: Based on underlying assets, including forward contracts, futures contracts, swaps, and options.
    • Foreign Exchange Instruments: Pertaining to international currency agreements and derivatives.
    • Asset managers charge fixed fees or percentages of assets under management (AUM).
    • Wealth management services combine investment management, tax and estate planning.
    • Consulting services offer specialized financial advice.
    • Insurance brokers earn commissions for policy placements.

    Financial Regulators

    • Institutions or authorities established to oversee financial markets, ensuring transparency, stability, and efficiency.
    • Responsibilities include:
      • Supervising financial entities for compliance with regulations.
      • Operating independently to maintain credibility.
      • Protecting consumers from unfair practices and fraud.

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    Description

    This quiz explores the relationship between government policy and risk management in the financial sector. It also delves into the three phases of evolution in the Indian financial system: Pre-Independence, Post-Independence, and the impact of reforms after 1991.

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