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Explain The Features

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19 views5 pages

Explain The Features

Uploaded by

Prikki Parker
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Explain the features, functions, and importance of Indian Financial System

Features of the Indian Financial System:

1. Diverse Financial Institutions:


o Comprises commercial banks, non-banking financial companies (NBFCs),
insurance companies, mutual funds, pension funds, and more.
2. Regulatory Framework:
o Regulated by key institutions such as the Reserve Bank of India (RBI), Securities
and Exchange Board of India (SEBI), Insurance Regulatory and Development
Authority of India (IRDAI), and Pension Fund Regulatory and Development
Authority (PFRDA).
3. Financial Markets:
o Money Market: Deals with short-term funds (up to one year), like treasury bills,
commercial papers, and certificates of deposit.
o Capital Market: Focuses on long-term financing through debt and equity
instruments like shares and bonds.
o Foreign Exchange Market: Handles currency exchange for international trade and
investments.
4. Financial Instruments:
o Encompasses instruments like bonds, stocks, derivatives, government securities,
and mutual funds that provide avenues for investment and funding.
5. Payment and Settlement Systems:
o Includes systems like NEFT, RTGS, IMPS, and UPI that facilitate secure, quick,
and seamless financial transactions.
6. Developmental Finance Institutions (DFIs):
o Specialized institutions like NABARD, SIDBI, and EXIM Bank cater to the
development of agriculture, small industries, and foreign trade.

Functions of the Indian Financial System:

1. Facilitation of Capital Formation


2. Provision of Credit
3. Risk Management
4. Efficient Payment Mechanisms:
5. Wealth Management and Savings:

Importance of the Indian Financial System:

1. Economic Growth and Development


2. Promotes Investment
3. Financial Inclusion
4. Monetary and Financial Stability
5. Efficient Allocation of Resources
6. Global Connectivity
2. Explain the methods of raising funds from the primary market.

Raising funds from the primary market involves issuing new securities to raise capital for
various purposes such as business expansion, debt repayment, or financing new projects.
Here are the primary methods through which companies can raise funds from the primary
market:

1. Initial Public Offering (IPO)


2. Follow-On Public Offer (FPO)
3. Rights Issue
4. Private Placement
5. Offer for Sale (OFS)
6. Qualified Institutional Placement (QIP)
7. Debt Financing

Steps Involved in Raising Funds from the Primary Market

1. Pre-Issue Preparation
2. Regulatory Approvals
3. Appointment of Intermediaries
4. Pricing and Valuation
5. Marketing and Promotion
6. Issue Process
7. Listing on Stock Exchanges

3. What do you mean by new issue market? Explain the functions and methods of floating new
[--[-issues

New Issue Market (Primary Market):

The New Issue Market or Primary Market refers to the market where companies issue new
securities (such as shares or bonds) to investors for the first time. The capital raised through this
market is used by companies to fund their expansion, development projects, or repay debt.

Functions of the New Issue Market:

1. Capital Formation:
2. Facilitating Economic Growth:
3. Encouraging Investment:
4. Risk Diversification
5. Promotion of Corporate Ownership
6. Resource Allocation
Methods of Floating New Issues:

1. Public Issue (Public Offer):


2. Initial Public Offering (IPO)
3. Follow-On Public Offer (FPO)
4. Rights Issue
5. Private Placement
6. Offer for Sale (OFS)
7. Qualified Institutional Placement (QIP)
8. Debt Financing

4 . Commercial Bill Market:


Definition:
The Commercial Bill Market refers to the market where short-term, negotiable instruments
known as commercial bills are bought and sold. These bills are issued by businesses to raise
funds to finance their working capital requirements, primarily for trade transactions.
Key Features:
 Short-term Instruments
 Self-liquidating:
 Discounting
 Negotiable Instruments

5. Commercial Paper (CP):


Definition:
Commercial Paper (CP) is a short-term, unsecured promissory note issued by large,
creditworthy corporations to raise funds to meet their short-term financial needs, such as working
capital or inventory management.
Key Features:
 Unsecured
 Short-term
 Discounted Instrument
 Highly Liquid
 Denominations
6.Call Money Market:

Definition:

The Call Money Market is a segment of the money market where short-term funds are
borrowed and lent for a period ranging from overnight to a few days. It is mainly used by banks
and financial institutions to meet their short-term liquidity requirements.

Key Features:

 Overnight Funds
 Unsecured
 Highly Volatile
 Participants: commercial banks, cooperative banks, and primary dealers.
 Interbank Market

7. Book Building:

Definition:

Book Building is a process used by companies during an Initial Public Offering (IPO) or
Follow-on Public Offering (FPO) to determine the price at which shares will be issued. It
involves generating, capturing, and recording investor demand for shares during the offering
period.

Key Features:

 Price Discovery
 Bidding Process
 Book Runner
 Cut-off Price
 Transparency

8. Importance of REPOs and Reverse REPOs in RBI’s Monetary Policy:

Repo (Repurchase Agreement) and Reverse Repo are crucial monetary policy instruments
used by the Reserve Bank of India (RBI) to control liquidity in the financial system, manage
inflation, and stabilize the economy.
1. Repo Rate:

Definition:

The Repo Rate is the interest rate at which the RBI lends short-term funds to commercial banks
against government securities

Importance in Monetary Policy:

 Liquidity Management:
 Controlling Inflation:
 Cost of Borrowing:
 Monetary Transmission:

2. Reverse Repo Rate:

Definition:

The Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks.

Importance in Monetary Policy:

 Absorbing Excess Liquidity:


 Short-term Interest Rate Control:
 Managing Inflationary Pressures:
 Liquidity Cushion for Banks:

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