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  1. 1. By eNotesMBA
  2. 2. Objective of this PPT To understand the working and organisation of Indian financial system
  3. 3. Introduction to Financial System Financial system is a mechanism that works for investors and people who want finance. It is an interaction of various intermediaries, market instruments, policy makers and various regulations to aid the flow of saving from savers to investors and checking various abuses faced in the proper functioning of the system.
  4. 4. Financial System
  5. 5. Indian Financial System Pre- planned period Close character of entrepreneurship Absence of financial Intermediaries Low industrial growth rate Mixed economy based planned period Public/ Govt. ownership of financial institutions  RBI, Nationalised banks, Special purpose financial institutions Investors’ protection  Companies act, Securities contract act
  6. 6. Money Market Meaning Prof Sayers- money market is that area of market that deals in short term capital. Market for funds and assets that are close substitutes for money Focuses on providing means by which government and institutions are able to rapidly adjust their actual liquidity position.
  7. 7. Instruments of Money Market Call money instruments- one day loan Treasury bills- meeting short term deficits of govt Commercial papers- short term instruments issued by corporate- introduced in Jan 1990 Certificate of deposits- issues by banks to the depositor, introduced in June 989- lowest period 15 days for 5 lakhs Repo transactions- maturity of 1 day to six months Money market mutual funds-introduced by RBI in April 1992 and regulated by SEBI
  8. 8. Capital Market Meaning Market where long term and medium term financial instruments are traded. This market consists of two parts: Primary market By prospectus  Offer for sale  Private placement  Right issue  Right issue  Employees stock option  Sweat equity 
  9. 9. Secondary Market Located at a fixed place  Securities of listed companies are traded  Purpose is to transfer ownership 
  10. 10. Instruments of Capital Market Equity shares Preference shares Debentures/ bonds Innovative debt instruments Convertible debentures/bonds Warrants Zero interest bond Secured premium notes Floating rate bond
  11. 11. Instruments of Capital Market cont.. Forward contract Not standardized, regulated through trading, margin is required Futures Standardized , traded at over the counter market, involves counter party risk
  12. 12. Financial Intermediaries Banking Non-banking Developmental Regulatory Institutions •RBI •Commercial banks •Co-operative banks •Post office savings banks •LIC •GIC •UTI •Housing development finance companies-HDFC, HUDCO •ICICI, IDBI,IFCI •NABARD SIDBI •Tourism finance corporation •SFCs •SEBI •RBI •IRDA- insurance regulatory and development authority •Board of regulatory and development authority-BIFR
  13. 13. Equilibrium in Financial Markets Interest rate Lending Price Supply Borrowings Amount of loan funds If the interest rate rises lenders are ready to provide more funds Borrowers are ready to borrow when interest rate falls. Demand Amount of securities Investors are willing to buy more securities as price falls, and sell more when price rises.