Indian Financial System

The Indian financial system serves as a link between fundraisers and investors. It involves the sale and purchase of treasury securities such as banknotes, bonds, securities, foreign currency, and contracts.

Articles 268-293, mentioned in Part XII of the Constitution, specifies the financial relations between the Center and the States.

Indian financial system introduction

States in India were not sovereign entities before the foundation of the federation. As a result, there are no specific guidelines to protect the states when required. The central-state financial relationship has undergone a substantial transformation as a result of the 101st amendment to the constitution and the implementation of the Goods and Services Tax (GST) in India. Bilateral financial relations between the Center and states are set out in articles 268 to 280 of the Constitution of India.

It is a mechanism that facilitates the movement of equity and debt money by bringing together financial institutions (banks, etc.), financial products (bonds, stocks, etc.), associations (investment banks), and regulatory authorities (RBI, SEBI, etc.). In addition, the Indian Financial system provides a marketplace where market participants can trade resources at prices established by producers and consumers.

Importance of the Indian financial system

The Indian Securities system plays a variety of roles:

• The Financial system facilitates the transfer of funds between savers and investors, besides helping them determine the prices of securities. 
• It aids in determining the prices of different financial products (bonds, stocks, etc.) based on demand and supply. 
• It allows investors to sell their holdings and convert assets to cash within a short time frame, thereby making the financial commodity market more dynamic.
• It also offers a platform for producers and consumers to find each other easily. 
• It facilitates the flow of new savings by investors into the country, which contributes to capital formation.

Stock exchanges’ role in the Indian Financial system:

Stock exchange markets play an important role in the financial system. The system facilitates transactions between traders of financial instruments and their prospective buyers. India’s stock exchanges are regulated by the Securities and Exchange Board of India or SEBI. 

The stock market in India enables investors to trade investment instruments, such as stocks, bonds, securities, and currencies. This is an online platform for buyers and sellers to trade financial tools at specific hours during the day while adhering to the rules that are laid out by SEBI. Nevertheless, only companies that are listed on a stock exchange are allowed to trade on it. 

However, stocks that are not registered on a reputable securities exchange can still be traded via over-the-counter (OTC) derivatives. In OTC derivatives, two counterparties arrange a financial contract with minimal regulations. Moreover, these can be tailored to the needs of the parties involved. However, these shares are not highly valued on the stock exchange.  

Financial system indices (Stock Indices)

A stock index is a statistical metric that indicates how the values of stocks in publicly traded corporations have changed over time. Moreover, it shows the general market sentiment and the direction of price movements in financial, commodities, or any other market. The following are also some of the major stock market indices:

• NIFTY 50: It is an index consisting of 50 stocks representing 13 economic sectors
• BSE SENSEX: It is a free-floating market-weighted stock market index comprising 30 reputable and financially secure businesses listed on the Bombay Stock Exchange. 
• S & P CNX 500: It is India’s first broad-based stock market index. S&P CNX 500 makes up almost 96% of total market capitalisation.
• MSX-SX: Multi Commodities Market Exchange ranks third among India’s national stock exchanges after the Bombay Stock Exchange and National Stock Exchange. The exchange allows trading in the shares of 1,116 listed companies.
• Other stock indices include NIFTY India Consumption, NSE Midcap, etc.

Indian Financial system – Regulatory bodies

Financial systems and institutions in India, like banks, insurance companies, etc., are regulated by autonomous regulatory agencies. Such as:

• The money market is regulated via the Reserve Bank of India.
• The capital market and mutual fund market are regulated via the Securities Exchange Board of India (SEBI)
• The insurance marketplace is regulated via the Insurance Regulatory and Development Authority (IRDA); and
• The pension fund is regulated through the Pension Fund Regulatory and Development Authority (PFRDA). 

Conclusion

The Indian Capital Market is a place for buyers and sellers to buy and sell financial instruments such as stocks, bonds, and other securities. The Financial system provides a platform for buyers and sellers to trade assets at prices based on supply and demand. However, only corporations that are authorised on a stock market are permitted to trade on it. Nevertheless, stocks not listed on a reputable securities exchange can be bought and sold on over-the-counter derivatives. However, these securities might not have a high market value.