How Indian Financial Market is Structured?

There was a time when India was primarily an agriculture based economy.

But today the service sector and the manufacturing sector contributes to about 75% of India’s GDP.

Today India is one of the fastest growing economies of the world.

To sustain this kind of growth, a robust financial market is essential.

A country which does not have a robust financial market, cannot grow at a fast rate.

It is the financial system that acts as a support service to the economic growth.

How strong is the support system (Financial market) of India?

For any economy to grow, it need resources (funds) to meet its goals.

When we talk about financial market it includes:

  • Efficient banking system,
  • Strong security market,
  • Reliable foreign exchange market,
  • Commodity market,
  • Insurance sector, and
  • Regulatory services.

Presently India has all of these support system working transparently and efficiently.

Role of Indian financial market

It is the financial market of a country which ensures efficient transfer and proper allocation of resources (funds).

When necessary-funds are allocated on time, more productive work gets done.

Who are the end users of these funds?

The funds are required by the business, government, and by the citizens of the country for personal use.

Who allocate the funds to the users?

Funds are channelized to the end user by banks, financial institutions, insurance companies, mutual funds etc.

In common language we can say that the main role of the financial market is to ensure fluidity in economic activity.

It means, country’s economic activity should not get hampered due to shortage of funds.

Anybody needs funds for any kind of economic activity should have easy access to it.

But how the financial market generate funds?

It is the role of the financial market to collect funds from the lenders and give it to the borrower.

The financial market collect funds from investors, and keep those funds available for the needy borrowers.

It is the role of the financial market to ensure easy and ethical transfer of funds from investors to the borrower.

The financial market here acts as a middleman.

Also the function of financial market is to ensure that the cost of borrowing is lucrative for the end user.

If the cost is too high nobody will borrow money.

If the cost is less than the investors will not get the desired returns.

It is the role of financial market to ensure balance between investors requirement and borrowers needs.

The structure of Indian financial market can be represented like this:

Broadly, financial market comprises of money market and security market.

Money market ensure short-term lending and borrowing of funds between investors and borrowers.

In Security market:

  • The fund transfer takes place for long-term.
  • Debt and equity-based financial products are traded.

In primary market, the securities are issued by the issuer to the investor.

But the secondary market allows investors to exit the market as per their convenience.

In a economy it is essential provide both, easy investing and easy exiting opportunity to the investors.

This is done in the secondary market.

Participants who are included within the financial market framework our banks, financial institutions, depository participants, brokers etc.

Other Markets

Apart from the financial market in India, other markets also exist which support in the construction of Indian economy.

The markets are commodity market, foreign exchange market, insurance market and pension market.

#1. Money Market – The Banking System

The banking system is the core of any financial market.

What banking system does most important is, collecting savings from citizens, government and corporate.

This collection of savings makes it possible for the banks to provide credit to the needy.

How’s the banking system work in India?

#1.1 RBI (Regulator No.1):

The mother of all banks in India is The Reserve Bank of India (RBI).

The RBI is the regulator of all banks operating in India.

RBI also formulates monitory policy for India.

It is RBI which gives license for banks.

RBI is also the banker for the government of India.

RBI also has the authority to issue currency notes in the economy.

How RBI regulates Indian banks?

They does this by mean by using key tools.

First, it ensure sufficient liquidity in the market by lending money to Indian banks if required.

Secondly, RBI also regulates the SLR and CRR, which in turn controls the credit available in the market.

Other Regulators: There are regulators present in India who specialise in their own fields.

EXIM banks takes care of export and import activities.

NABARD takes care of Rural development. NHB takes care of the housing sector.

#1.2 Scheduled Commercial Banks:

In India scheduled commercial banks are either run by the government.

Example: Public sector banks like SBI or are privately managed (private banks like ICICI Bank).

#1.3 Non-scheduled Commercial Banks:

These are banks specific for particular area (like Cosmos bank).

#1.4 Co-operative banks:

State, and district level cooperative banks also operate in India. These banks cater to rural India.

#1.5 Payment Banks:

This is a new initiative by the Indian government to include people within the ambit of banking network.

The payment banks provide small savings, payments, remittance service to the account holders.

The main function of the banking system in India is to collect deposits and issue loans to the needy.

The banks acts as a middleman between dose people who have surplus funds and those people who need loans.

Also the function of banks to do evaluation before issuing the loan to the needy.

This is done to ensure that whether the borrower is capable of repaying the principal and interest.

It is the banking system which provides the logistics for fund transfer.

These days the fund transfer in India is mainly done by online services, checks, cash etc.

It is also the purview of Indian banks to provide insurance and investment advice to its customers.

Banks also have tieups with mutual fund companies, insurance companies, so that their products can be sold to bank account holders.

#2. Security Market – Stock Exchange

Indian household has small savings.

Indian business need funds to meet their capital requirements.

Generally what Indian households do is to invest their savings in options like savings account and bank deposits.

If an Indian household want to invest in business, it can be done through the security market.

How this is done?

Business which needs capital list their security (stocks, bonds, etc) in the stock market.

This security is very liquid, anybody can buy it and sell it any time.

Hence, this kind of financial instrument becomes suitable for common man.

Stocks and bonds of Indian business are sold to investors through stock market.

It is also the responsibility of the stock market to ensure that the business provides all necessary information required for the investors before taking an investment decisions related to stock market.

All activities of stock market are regulated and hence wrongdoing in the transactions are very rare.

It is the process of investing once savings to buy securities like stocks converts once savings into an asset.

These assets in turn provides returns to its investor.

It is a win-win situation for both the parties. Issuer of security is able to generate funds easily.

The investor is able to invest their savings and earn higher returns easily.

It is in the security market where stocks are issued. Then the security (like stocks) is purchased by the investor.

The same investor can then subsequently sell his stock holdings to other investors.

All of this becomes possible because of the presence of security market.

#2.A Primary Market:

This market is also called the new issue market.

Primary market that sure of stocks first sell their holdings to the public (investor).

#2.B Secondary Market:

The stock exchange that we commonly know is actually a secondary market.

In secondary market, investors trade in those stocks which has already been issued in the past, in the form of IPO in primary market.

The primary market is where the assets (stocks) are sold by company to the public.

In secondary market, the stocks only gets transferred from one hand to the other.

Types of investors in the stock market, First: retail investors and institutional investors.

#2.C Retail Investors:

Retail investors are mainly individuals who invests money in stock market from there accumulated personal savings.

#2.D Institutional Investors:

They are like companies, mutual funds, trust, banks, Insurance companies etc.

Participants of Indian Financial Market

The main entity of Indian financial market our investors and the borrowers.

But between the investor in borrowers, there are several participants which ensure smooth and efficient operations.

#2.1 Who are these participants?

#2.1.1. Stock Exchange:

stock exchange provides a platform where stocks can be traded effectively.

There are two main stock markets in India, NSE and BSE.

In India stock trading happens online through electronic trading terminals.

#2.1.2. Depository Participants (DP’s):

It is the banks which provides depository services to investors.

DP’s are the one who ensures that the traded stocks are kept safely in the respective accounts off the investor.

Earlier, investors use to hold physical shares certificates as a proof of their shareholding.

But these days, there are no share certificates.

The holdings in one’s depository account is the proof of ones holdings.

#2.1.3. Custodians:

Large banks in India act as custodians for institutional investors.

It is these banks which ensure money transfer during trade, security transaction after trade, etc on behalf of institutional investors.

#2.1.4. Stock Brokers:

There are two types of brokers registered in Indian stock market.

  1. First as stock brokers and,
  2. Other as sub-brokers.

Only the brokers are allowed to trade stocks stock market.

Sub-brokers are affiliates of the main brokers.

Through the sub- brokers, brokers extend the reach to large number of investors.

#2.1.5. Investment Banks:

Investment banks work for corporate or government.

They provide investment advice to their customers.

They also raise funds on behalf of their customers as and when required.

#2.1.6. Commercial Banks:

It is the commercial banks which accept deposits, issue loans, and ensure needful payment service.

These banks ensure that sufficient liquidity he’s always maintained to fund the market demand.

All the banks that we know (SBI, ICICI, HDFC, AXIS..etc) are commercial banks.

#2.1.7. Insurance companies:

It is the insurance companies which provides:

  • Life insurance,
  • Auto insurance,
  • Property insurance,
  • Health insurance etc to the public.

Life insurance companies provide cover for life.

General insurance companies provide cover for other risks.

#2.1.8. Pension Funds:

It is the job of pension funds to collect deposits from investors to build an investment portfolio suitable for retirement savings.

#2.1.9. AMC:

Asset Management Companies (AMC) are investment specialists.

It is these AMC’s which manage and provide Mutual Fund units.

Investors pool their funds by buying units from AMC’s.

These AMC’s in turn invest the collected money according to the objective of the mutual fund.

#2.2 Regulators of Indian Financial Market

The process of regulating the Indian financial market is a Top Down approach.

It starts from the Finance Ministry of India.

The head of finance ministry is the Finance Minister himself.

Under the umbrella of Finance Ministry comes the following regulatory bodies:

#2.2.1. RBI

The Reserve Bank of India (RBI) makes and regulates:

  • Monitory policies,
  • Forex policies,
  • Credit policies, and also
  • Regulates banks.

#2.2.2 SEBI:

The Security and Exchange Board of India (SEBI) is the main regulatory which regulates the primary and secondary market (stock exchange etc).

#2.2.3. IRDAI:

The Insurance Regulatory and Development Authority of India (IRDAI) regulates the insurance sector of India.

#2.2.4 PFRDA:

The Pension Fund Regulatory and Development Authority (IRDA) regulates the pension sector of India.


The Indian financial market is structured in a way to promote saving, investment and resources utilisation.

Finance ministry of India makes financial policies for the public.

The participants of the financial market implements those policies for the larger good of the public and the economy as a whole.

A robust and efficient financial market is not only good for the home country only, but it also supports other economies of the world.

The Indian financial market has developed a lot over the past 60 years.

The way the Indian economy handled the global economic meltdown of 2008-2009 is a big example.

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Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it more

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