An overview of financial system in india

1. An Overview
Of Financial
System In
India
By,
Mathew v joseph
Mba
Marian college,kuttikanam,
kerala

2. Indian financial system
 Indian financial system consists of formal and
informal financial system.
 Based on the financial system financial
market, financial instruments and financial
intermediation can be categorized depending
upon functionality.

9.  Which are used for raising resources for corporate activities
 That are used for raising capital through the capital market are known as
‘capital market instruments’
 Preference shares, equity shares, warrants, debentures and bonds
 That are used for raising and supplying money in short period not
exceeding one year through various securities are called ‘money market
instruments’
 For example, treasure bills, gilt-edge securities, state government and
public sector instruments, commercial paper, commercial bills etc.

10. 1. Financial institutions serve individuals and institutional investors.
2. help to raise the required funds and assure the efficient deployment of
funds.
3. extend their service up to the stage of servicing of lenders.
4. provide services like bill discounting, factoring of debtors, parking of short-
term funds in the money market, e-commerce, securitization of debts
5. provide some specialized services like credit rating, venture capital
financing, lease financing, factoring, mutual funds, merchant banking,
stock lending, depository, credit cards, housing finance, and merchant
banking

11. An overview of fiscal and
monetary policies in India

12. Monetary policy of India
Monetary policy is the process by which
monetary authority of a country , generally
central bank controls the supply of money in the
economy by its control over interest rates in
order to maintain price stability and achieve high
economic growth. In India, the central monetary
authority is the Reserve Bank of India (RBI). It is
so designed as to maintain the price stability in
the economy.

13. Monetary Policy Committee
The Reserve Bank of India Act, 1934 (RBI Act) was
amended by the Finance Act, 2016, to provide for a
statutory and institutionalized framework for a Monetary
Policy Committee, for maintaining price stability, while
keeping in mind the objective of growth. The Monetary
Policy Committee is entrusted with the task of fixing the
benchmark policy rate (repo rate) required to contain
inflation within the specified target level. As per the
provisions of the RBI Act, out of the six Members of
Monetary Policy Committee, three Members will be from
the RBI and the other three Members of MPC will be
appointed by the Central Government.

14. Objectives of the monetary
policy of India, as stated by
RBI
 Price Stability
Price Stability implies promoting economic development
with considerable emphasis on price stability. The center of
focus is to facilitate the environment which is favorable to
the architecture that enables the developmental projects to
run swiftly while also maintaining reasonable price stability.
 Controlled Expansion Of Bank Credit
One of the important functions of RBI is the controlled
expansion of bank credit and money supply with special
attention to seasonal requirement for credit without affecting
the output.

15. Restriction of Inventories and stocks
Overfilling of stocks and products becoming outdated
due to excess of stock often results in sickness of the
unit. To avoid this problem the central monetary
authority carries out this essential function of
restricting the inventories. The main objective of this
policy is to avoid over-stocking and idle money in the
organization.
To Promote Efficiency
It is another essential aspect where the central banks
pay a lot of attention. It tries to increase the efficiency
in the financial system and tries to incorporate
structural changes such as deregulating interest
rates, ease operational constraints in the credit
delivery system, to introduce new money market
instruments etc.

16.  Reducing the Rigidity
RBI tries to bring about the flexibilities in the
operations which provide a considerable autonomy. It
encourages more competitive environment and
diversification. It maintains its control over financial
system whenever and wherever necessary to
maintain the discipline and prudence in operations of
the financial system.
Promotion of Fixed Investment
The aim here is to increase the productivity of
investment by restraining non essential fixed
investment

17. Monetary operations
Monetary operations involve monetary techniques
which operate on monetary magnitudes such
as money supply, interest rates and availability
of credit aimed to maintain Price Stability,
Stable exchange rate, Healthy Balance of Payment,
Financial stability, Economic growth. RBI, the apex
institute of India which monitors and regulates
the monetary policy of the country stabilizes the price
by controlling Inflation.

18. Instruments of Monetary policy
These instruments are used to control the money flow
in the economy
Open Market Operations
An open market operation is
an instrument of monetary policy which involves
buying or selling of government securities from or to
the public and banks.
The RBI sells government securities to control the
flow of credit and buys government securities to
increase credit flow. Open market operation makes
bank rate policy effective and maintains stability in
government securities market.

19.  Cash Reserve Ratio
Cash Reserve Ratio is a certain percentage of bank
deposits which banks are required to keep with RBI in the form of
reserves or balances. Higher the CRR with the RBI lower will be
the liquidity in the system and vice versa. Rate 4%
 Statutory Liquidity Ratio
Every financial institution has to maintain a certain quantity of
liquid assets with themselves at any point of time of their total
time and demand liabilities. These assets have to be kept in non
cash form such as approved securities like bonds etc. The ratio
of the liquid assets to time and demand assets is termed as
the Statutory liquidity ratio. Rate 20%
 Credit Ceiling
In this operation RBI issues prior information or direction that
loans to the commercial banks will be given up to a certain limit.
In this case commercial bank will be tight in advancing loans to
the public.

20.  Bank Rate Policy
The bank rate, also known as the discount rate, is the rate
of interest charged by the RBI for providing funds
or loans to the banking system. This banking system
involves commercial and co-operative banks, Industrial
Development Bank of India, IFC, EXIM Bank, and other
approved financial institutes.
 Credit Authorization Scheme
Credit Authorization Scheme was introduced in November, 1965
when P C Bhattacharya was the chairman of RBI. Under this
instrument of credit regulation RBI as per the guideline
authorizes the banks to advance loans to desired sectors.
 Moral Suasion
Moral Suasion is just as a request by the RBI to the commercial
banks to take so and so action and measures in so and so trend
of the economy. RBI may request commercial banks not to give
loans for unproductive purpose which does not add to economic
growth but increases inflation.

21. Repo Rate and Reverse Repo Rate
Repo rate is the rate at which RBI lends to its clients
generally against government securities. Reduction in
Repo rate helps the commercial banks to get money
at a cheaper rate and increase in Repo rate
discourages the commercial banks to get money as
the rate increases and becomes expensive. Reverse
Repo rate is the rate at which RBI borrows money
from the commercial banks.
Repo rate- 6.0%
Reverse Repo rate- 5.75%

22. Fiscal policy
 Fiscal policy deals with the taxation and
expenditure decisions of the government.
These include, tax policy, expenditure policy,
investment or disinvestment strategies and
debt or surplus management.
- Kaushik Basu ( Former Chief Economic Adviser
)

23. OBJECTIVES OF FISCAL
POLICY
• Increase in capital formation.
• Degree of Growth.
• To achieve desirable price level.
• To achieve desirable consumption level.
• To achieve desirable employment level.
• To achieve desirable income distribution.

24. Fiscal Policy there are three
possible positions
 A Neutral position applies when the budget outcome
has neutral effect on the level of economic activity
where the govt. spending is fully funded by the revenue
collected from the tax.
 An Expansionary position is when there is a higher
budget deficit where the govt. spending is higher than
the revenue collected from the tax.
 An Contractionary position is when there is a lower
budget deficit where the govt. spending is lower than
the revenue collected from the tax.

25. The Two Main instruments of
fiscal policy
 Revenue Budget
 Expenditure Budget

26. Revenue Budget
 The taxing powers of the central
government encompass taxes on
income, excise on goods produced
(other than alcohol), customs duties,
and inter-state sale of goods.
 The state governments are vested with
the power to tax land and buildings,
sale of goods (other than inter-state),
and excise on alcohol.

27. Expenditure Budget
 The central government is responsible for issues that usually
concern the country as a whole like national defense, foreign
policy, railways, national highways, shipping, airways, post and
telegraphs, foreign trade and banking.
 The state governments are responsible for other items including,
law and order, agriculture, fisheries, water supply and irrigation,
and public health.
 Some items for which responsibility vests in both the Centre and
the states include forests, economic and social planning,
education, trade unions and industrial disputes, price control and
electricity.

28. Thank U