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Indian Financial System

Debjani Singha

Financial System
y Existence y Promotes y Money

of a well organized financial system

the well being and standard of living of the people of a country and monetary assets the saving investment

y Mobilize y Promotes

Definition
The processes and procedures used by an organizations management to exercise financial control and accountability
y

These measures include recording , verification ,and timely reporting of transaction that affect revenues , expenditures ,Assets and Liabilities.

Flow of funds (savings)

Seekers of funds (Mainly business firms and government)

Flow of financial services

Suppliers of funds (Mainly households)

Incomes , and financial claims

Financial System

Signification of Financial System


y

Money & Finance play an important Role in Economic activities. Development of Economic

Basic Econ Concepts


Like scarcity, needs and wants, and junk like that

Economics is the Social Science that analyzes the production , distribution , and consumption of goods and Services

Needs and Wants

Limited quantities of resources to meet unlimited wants.


Whats that mean?

Scarcity

Your wants are pretty much unlimited.


Even if yours personally arent, once you add up everybody in the population, the collective wants are unlimited.

All resources, goods, and services are limited, however. y This means its impossible for all the wants to be met.
y

Scarcity

Economics, then, tries to solve the problem of scarcity.


This doesnt mean to make unlimited stuff, but figuring how to distribute scarce, limited stuff in the best way to meet wants. It also wants to see how people satisfy needs and wants by the choices they make.

Scarcity

y y

Goods
Stuff.

Services
Things people do for others.

Goods and Services

When there isnt enough stuff.


Not enough of a product can be supplied or it wont be supplied. At least not at current prices. If prices go up, it may become profitable for somebody to provide the good or service and that will eliminate the shortage.

Shortage

Land, Labor, Capital y These have specific meanings in economics.


y

Factors of Production

All natural resources used to produce goods and services.

Land

Work people get paid for.

Labor

Human-made resources used to produce stuff or provide services.


Note this is different from land, which is natural resources. Two types: Physical and Human.

Capital

Interrelation-Financial system & Economy Financial System


Savers Lenders Households Foreign Sectors

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy

Components of Financial System

Indian Financial System

Organized Regulators Financial Institutions Financial Markets Financial services

Non- Organized Money lenders Local bankers Traders Landlords Chit Funds

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products

Components of Financial System

Regulator s

Financial Instruments

Financial Markets

Financial Intermediarie s Credit Market

Forex Market

Capital Market

Money Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

RBI

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.
Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

The Bank was constituted for the need of following:


1) To regulate the issue of banknotes 2 )To maintain reserves with a view to securing monetary stability and 3) To operate the credit and currency system of the country to its advantage.

Organization & Managements of RBI

Function of Reserve bank of India(RBI)

1) Bank of Issue 2) Banker to Government 3) Bankers' Bank and Lender of the Last Resort 4) Controller of Credit 5) Custodian of Foreign Reserves 6) Supervisory functions 7) Promotional functions

Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality The assets and liabilities of the Issue Department are kept separate from those of the Banking Department

Bank of Issue

The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations Its provides Loans to Local and state banks It acts as adviser to the Government on all monetary and banking matters.

y y

Banker to Government

y y

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit .

Bankers' Bank and Lender of the Last Resort

y y y

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. As supereme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Controller of Credit

Manages the Foreign Exchange Management Act, 1999. y Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. y The Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. (International Monetary Fund )
y

Custodian of Foreign Reserves

Prescribes broad parameters of banking operations within which the countrys banking and financial system functions. y Objective: maintain public confidence in the system, protect depositors interest and provide cost-effective banking services to the public. y Regulator and supervisor of the payment systems Authorises setting up of payment systems Lays down standards for operation of the payment system Issues direction, calls for returns/information from payment system operators
y

Supervisory functions

The Bank now performs a variety of developmental and promotional functions:

1) Industrial Development Bank of India also in 1964. 2) Agricultural Refinance Corporation of India in 1963 3) Industrial Reconstruction Corporation of India in 1972 4) Agricultural Refinance and Development Corporation to provide longterm finance to farmers. 5) Agricultural Credit Department to provide agricultural credit .

Promotional functions

Credit creation

Money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Second, the new money introduced by the central bank is multiplied by commercial banks through fractional reserve banking; this expands the amount of broad money (i.e. cash plus demand deposits)

y 1)

2)

credit control

y Objectives
1)

of Credit Control

Price Stability:Price stability is an important objective of credit control policy. The central bank, by regulating the supply of credit in accordance with the commercial needs of the people, can bring about price stability in the country.

2) Economic Stability:Operation of the business cycle brings instability in a capitalist economy. The objective of the credit control policy of the central bank should be to eliminate cyclical fluctuations and ensure economic stability in the economy.

3) Maximisation of Employment:
Therefore economic stability with full employment and high per capita income has been considered as an important objective of credit control policy of a country.

4 ) Economic Growth:
Countries generally suffer from the deficiency of financial resources. Hence, the central banks in these countries should solve the problem of financial scarcity through planned expansion of bank credit.

5) Stabilisation of Money Market:


Credit control should not be exercised there should be equilibrium in the demand and supply of money should be achieved at all times.

6) Exchange Rate Stability:


Instability in the exchange rates is harmful for the foreign trade of the country Thus, the central bank, in the countries largely dependent upon foreign trade, should attempt to eliminate the fluctuations in the foreign exchange rates through its credit control policy.

Monetary policy

Monetary policy is a tool used by the central bank to manage money supply in the economy in order to achieve a desirable growth The central bank controls the money supply by increasing and decreasing the cost of money, the rate of interest.

What is monetary policy?

Expansionary policy :- The policy makers increase the money supply in the system by lowering interest rates. This is done mainly to boost economic growth and decrease level of unemployment. y Contractionary policy:-the cost of money is made dearer by increasing the rate of interest, which in turn helps in reducing the money supply in the system and combat inflation
y

What are the different forms?

1) Open Market Operations :y An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations. y In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities. 2) Bank Rate :y Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. y Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit.

Instrument of Monetary Policy

3) Direct Regulation of Interest Rate :y The RBI can control the monetary policy by regulating market rate of interest Directly .It has been fixing all deposit rate of commercial bank and their lending rates 4) Cash Reserve Ratio :y All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent. 5) Statutory Liquidity Ratio :y Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. y These are collectively known as SLR securities

6) Reserve requirements (RR):(RR):y percentages of certain types of deposits that banks must keep on hand in their own vaults or on deposit at a Federal Reserve Bank RR raised RR lowered banks reduce lending banks increase lending

Monetary Policy
y y

Fiscal policy
y y

Monetary policy is typically implemented by a central bank. Monetary policy is expected to improve the economy's rate of growth of output (measured by Gross Domestic Product or GDP) Monetary policy is policy by which the amount of money and credit available aims to affect the economy. Eg:- Fed has decided to lower or raise the interest rate

while fiscal policy decisions are set by the national government Fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run Government spending and taxing policies that aim to affect the economy are fiscal policies. Eg:- the recent economic stimulus package, through which the government spent a great deal of money in order to try and stimulate the economy

What is the difference between fiscal and monetary policy?

Indian Capital Market

Market

Instruments

Intermediaries Regulator
SEBI

Primary

Secondary

Brokers Investment Bankers Stock Exchanges Underwriters Hybrid Debt

Equity

Players

CRA

Corporate Intermediaries

Individual

Banks/FI

FDI /FII

Thank you

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