Project on Indian Financial Market - Module: 2
Financial Market Structure
[Source: RBI Report on Currency and Finance 1999-2000 dated January 29, 2001]

Preface & Introduction

An understanding of the organisational structure of markets for financial assets is vital for knowing the limitations and prospects in relation to efficiency, integration and stability. Financial markets in India comprise in the main, the credit market, the money market, the foreign exchange market, the debt market and the capital market . Recently, the derivatives market - OTC and exchange traded - has also emerged. With banks having already been allowed to undertake insurance business, bancassurance market is also likely to emerge in a big way. One could, in fact, refer also to household finance market, NBFC market, and insurance market, as holding considerable promise in the years to come. These markets are not yet as developed and regulated as the credit/foreign exchange/money/capital/gilt-edged markets. Besides, there is very little of good time-series data of these markets that could be regarded as subjected to competitive forces. It is for these reasons, the focus on these markets had to be limited in this Report. Most of the financial markets were characterised till the early 'nineties by controls over the pricing of financial assets, restrictions on flows or transactions, barriers to entry, low liquidity and high transaction costs. These characteristics came in the way of developments of the markets and allocative efficiency of resources channelled through them.

The initiation of financial sector reforms in the early 'nineties was essentially to bring about a transformation in the structure, efficiency and stability of financial markets, as also an integration of the markets. Some of the important structural changes enabled by financial sector reforms relate to introduction of free pricing of financial assets in almost all segments, relaxation of quantitative restrictions, removal of barriers to entry, new methods of floatation/issuance of securities, increase in the number of instruments and enlarged participation, improvement in trading, clearing and settlement practices, improvement in the informational flows, transparency and disclosure practices, to name a few. In this Chapter, an attempt is made to provide an account of the market structures and instruments of the financial sector, viz., the credit market, the money market, the foreign exchange market, the debt market, the capital market, the insurance market, and the recently established derivatives market and banc-assurance.

The organisational structure of the financial markets has important implications from the point of view of integration, efficiency and stability. A competitive market structure and transparent trading practices help in improving allocative efficiency of resources. With the initiation of financial sector reforms, a significant transformation has occurred in the structure of various segments of the financial markets. This module ob "Financial Market Structure" analyses the structure of various financial markets (the credit market, the money market, the foreign exchange market, the debt market, the capital market, the insurance market and the derivatives market) as it evolved during the 1990s.