UNIT 1 FINANCIAL MARKETS AND ENVIRONMENT
Objectives
The main objectives of the unit are to:
 provide an overall understanding on the role and functioning of
financial markets in an economy
 discuss major constituents of financial markets
 explain major products dealt with in a financial markets
Structure
1.1 Introduction
1.2 Role of Financial Markets
1.3 Financial Institutions
1.4 Direct Capital Flow
1.5 Primary Market Issue Facilitators
1.6 Secondary Market
1.7 Economic Importance of Financial Markets
1.8 Summary
1.9 Self-Assessment Questions
1.10 Further Readings
1.11 Statistical Tables
1.1 INTRODUCTION
Financial system in any country comprises two important segments
namely the surplus sector and the deficit sector. The surplus sector
consists of capital suppliers, who provide their savings for capital
formation. The major sources of capital come from individual/
household savings in the form of NSS, NSC, IVP, savings bank, fixed
deposits with banks and Non Bank Financial Institutions (NBFIs),
insurance (life and general), provident funds, retained earnings of
corporate sector, government budgetary support, and international
sources. The deficit sector comprises of capital seekers such as sole
proprietors, private and public limited companies, SSI units/cottage
industries, State level finance corporations, co-operative banks,
agricultural sector, rural industries, artisans etc. Table 1 and 2 show the
domestic savings and capital formation in the economy over the years.
In the last couple of years of your own observation, you could have seen
the formation of several new factories, roads, buildings, flyovers, etc.,
in your region. You can now observe in Table 1 and 2, the contribution
of financial system in enabling the capital formation in the economy.
Financial markets play a critical role in capital formation of the
economy and also channelizing the capital for productive purpose. The
capital mobilisation in any economy could be achieved through (a)
direct method where procurement of capital is channelled through the
money markets for short-term needs and capital markets for long-term
needs and; (b) indirect method wherein various financial institutions
facilitate the procurement and dissemination of the capital through the
intermediation and distribution functions. The entire process of
mobilizing and channelling the capital can be described as a financial
system. It consists of markets of different kinds, institutions associated
with such markets, products traded in the market and finally regulating
agencies.
In the following sections each of these markets, institutions, instruments
and their respective functions are discussed.
1.2 ROLE OF FINANCIAL MARKETS
As discussed earlier, the basic role of financial systems is to allow the
capital flow from surplus sector to deficit sector. That is from those
who have surplus capital to those who need such surplus capital. In
addition to this basic role, financial market is expected to ensure
frictionless flow of capital at lowest cost. For instance, if you get a rate
of interest from your bank at 6%, and the companies that have to
borrow capital from the bank has to pay 10%, the cost of converting the
savings to capital is 4%. An efficient financial market should ensure
that the cost is not this much high and tries to reduce the same to the
lowest possible level. Sometime, the cost of conversion is high because
of regulatory requirements. For instance, in the above case, if the bank
is required to keep some amount of your deposits (say 30%) in cash or
government securities, which earn an interest rate of 5%, then the bank
has to load 1% loss on this part of transaction (borrowing Rs. 30 at 6%
and investing the same at 5% due to regulatory requirement) when
lending takes place. Regulatory imposed costs increase when the
financial markets are unstable or risky. The financial markets should
allow innovation such that capital seekers come out with various new
products to attract large savings and also cater various needs of
investors. It should not only reduce the volatility of the market but also
facilitate suitable products to manage the risk arising out of financial
transactions. It should also allow use of advanced technologically to
reduce the cost of financial transactions. For instance, today it cost a lot
and long time for someone to collect outstation cheque in a typical old
bank whereas technologically advanced new banks like ICICI Bank,
HDFC Bank, etc. offer such collection at much shorter time.
Activity 1
1) Interest rates in the market have declined over the years for various
reasons? Can you think about few reasons contributed by financial
systems?
………………………………………………………………………
………………………………………………………………………
………………………………………………………………………
2) In Table 4, we listed down borrowing and lending rates of various
maturity. How the interest rates have moved over the years and what
is the trend in the spread?
………………………………………………………………………
………………………………………………………………………
………………………………………………………………………
1.3 FINANCIAL INSTITUTIONS
An important function of financial markets is channelling savings for
productive capital. In a less developed economy, normally this task is
achieved by setting up suitable intermediary institutions of different
kinds, which in turn raise capital either directly or indirectly from the
market and then distribute the same to those who need capital. India
opted for this model after independence and set up a large number of
intermediary institutions at central, state and district levels. Table 3
shows the contribution of Financial Institutions in assisting small and
large companies over the years.
With the establishment of the Refinance Corporation for industry in
1956, the term financing and developmental finance institution have
catered to the medium term and long-term needs of Indian industries.
Their main functions are providing capital loans and advances, project
appraisal, promoting overall economic development through stimulating
promotional activities, mobilisation of funds and identification of
investible projects for development planning, project financing
assistance to backward areas and small scale sector, assistance to
infrastructure and key sectors, support for development of capital
market, nursing of sick units and merchant banking services,
technological consultancy and technology transfer, bridge loans, etc1.
Taking the above determinants into account, development-financing
institutions in India fall into four broad categories.
1. Central financial institutions viz. IDBI, IFCI, ICICI.
2. Investment institutions like LIC, UTI and GIC.
3. Pension funds.
4. State level finance institutions and other state level promotional and
finance agencies. (SIDCs/ SIICs /SSIDCs).
1.3.1 Central Financial Institutions
The central finance institutions extend their operations for all
companies in the country but confine their operations to organised
medium and large scale industries (exceptions being IDBI which
extends refinance facilities and ICICI which entertains foreign currency
requests from small units), render variety of financial assistance
including loans, underwriting and direct subscriptions to new issues of
equity and debentures and stand guarantee for assistance provided by
third parties, among others. They also undertake pre-finance
developmental State level institutions.
1.3.2 Investment institutions (LIC, UTI and GIC)
Development banks, as financial institutions, differ from other
conventional investment institutions supplying finance to industry like
Life Insurance Corporation of India, General Insurance Corporation,
Unit Trust of India and so on. The conventional investment institutions
1
However, the concept of development banking is slowly withdrawn after the
economic liberalisation and financial institutions get more freedom to take decision on
commercial basis.
owe their origin and growth to the institutionalisation of personal
saving, i.e. mobilisation of saving through financial intermediaries and
their channelaisation to profitable investment outlets. Developmental
banks emerged as a result of state-sponsorship, derive most of their
funds form the Government, the Reserve Bank of India (RBI), and
public or private financial institutions. Specialised financial institutions
like LIC and UTI provide financing mostly to other financial
institutions and subscribe to Government securities or approved
industrial securities. They are not specially designed to play so much of
development role, through their role in the capital market is quite
significant.
1.3.3 Pension funds
This is created by the contribution both by the employee and employer
towards a fund called pension fund. The amount thus realised is
invested in the government securities and in private sector stocks.
Government and government sponsored P.F. authority operates pension
scheme in India. Though there are very few private pension funds in
India at this point of time, India is likely to have more pension funds in
the near future. Already, LIC, UTI and a few private mutual funds and
insurance companies have started offering pension schemes. With the
establishment of private insurance companies, more such schemes are
expected from private mutual funds and insurance companies.
1.3.4 State level finance institutions and other promotional
agencies.
State finance corporations (SFC) concentrate primarily on financing
corporations, whereas State Industrial Development Corporations
(SIDCs) and State industrial Investment Corporations (SIICs) specialise
in developing and promoting projects.
Again, while financing
operations of SFCs are, by and large, restricted to small and medium
type of projects, SIDCs/SIICs have no such restrictions on size of
projects, though their volume of assistance to individual projects is
restricted. Furthermore, SIDCs/SIICs have industrial area development
functions in-built in their activities. Of late, many of them have started
developing IT park to cater the booming IT and BPO business in India.
Activity 2
3) Refer Table 2 and 3 and examine the role of intermediary
institutions in the capital formation of the country?
………………………………………………………………………
………………………………………………………………………
………………………………………………………………………
4) Since the economy is moving from manufacturing to service sector,
the need for long-term capital is coming down. What is the role of
intermediate institutions in this changing economic condition?
………………………………………………………………………
………………………………………………………………………
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1.4 DIRECT CAPITAL FLOW
Capital flow through intermediary institutions has certain problem
though they perform great service in a less developed market. Two
important problems related to capital flow through intermediate
institutions are: (a) It causes time lag between capital mobilization
activity and actual distribution of capital and sometime these
institutions initially sanction loan for projects and then raise capital; in
other words, the two activities are not instantaneous; (b) The cost of
distribution is also typically high and normally the spread is between 4
to 6 percent. Table 4 and 5 shows the interest rates offered by the banks
and lending rates of banks and financial institutions. You can measure
the kind of spread the banks make, which in turn adds up to cost of
capital of borrowers. Hence as the market develops, financial markets
allows direct flow of capital. Here those who need capital directly
approach those who have surplus with the help of certain agencies and
in that process the conversion of savings into productive capital is
instantaneous. Also, the agencies connected with direct flow charges
low service fee and that too it is one time expense unlike an
intermediate institution charging the spread every year. In this section
we discuss various components of this market, which mainly consists of
financial instruments and agencies facilitating direct capital flow.
Most securities transactions occur in one of the financial markets. In a
financial market, buyers and sellers meet to establish prices for
securities and to buy and sell them. The financial market may be in a
location where the buyers and sellers face each other or it may have
another type of organisation, where buyers and sellers are brought
together by some other means, such as an on-line participation in a
computerised network of security traders. Financial markets can be
categorised as primary markets or secondary markets. Primary market
transactions occur when a firm (or government) raises capital by selling
its securities to investors. When investors sell security to other
investors these transactions take place in secondary market.
Primary market allows firms to have a source of capital through the sale
of their securities. When a corporation wants to raise funds from
external source, it may choose to borrow from a financial institution,
which we had already discussed, or to sell securities in the securities
market to institutions, individuals or other investors. When the
corporation elects the second of these alternatives, it creates securities
in the form of debt, equity of contingent claims and sells them in
primary market. Money flows from investor to the firm, and the
investors receive some type of financial security, such as common stock
or bonds, in return. The primary market is therefore, the market for new
issues.
Activity 3
5) Perform a small survey with your friends or their parents through
them. Find out the percentage of savings they make through
different investment avenues like government sponsored securities
like PF, NSC, etc., investment in investment companies like LIC
and mutual funds and directly investing in bonds and shares of
companies. Draw brief conclusion based on the survey input.
………………………………………………………………………
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6) Based on the survey input, examine how much your respondents
contribute directly for the formation of capital and how much they
create capital through intermediary institutions? Ask
your
respondents whether there was any major shift in the way in which
they invest their savings.
………………………………………………………………………
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1.5 PRIMARY MARKET ISSUE FACILITATORS
a) Investment banker and merchant banking
Investment banker or merchant banker facilitates the issuing companies
to raise capital from the investors. Since issuers lack knowledge on
capital market, these institutions help the issuers in providing various
services like complying legal formalities, designing and pricing
instruments, etc. They also take an active role in distribution of the
securities to ultimate investors in selling their instruments to investors.
While investment bankers also subscribe the issue initially, the
merchant bankers provide only advisory service.
b) Underwriter
The initial distributing of securities by an entity other than the issuer,
with the risk of price fluctuations borne to some extent by the
distributor. The underwriter will aid the firm considering whether or
not to issue new securities in analysing its financing needs and make
suggestions about various means of financing. The underwriter may
also function as an advisor in mergers, acquisition, and refinancing
operations. Underwriters are also responsible for the investigations,
administrative paper work. They also supervise that pre issue
formalities are all done in accordance within the relevant legal
framework.
Underwriting was mandatory in India when SEBI
brought out initial guidelines for primary market issues but this
requirement was withdrawn subsequently.
c) Private placement
Not all new securities are underwritten if the investment banker finds
one large investor or a small group of investor for a new issue and
arranges for a direct trade between issuer and investor. This is said to
be a private placement. Thus in a private placement the investment
banker is compensated for acting as a middle link in bringing buyer and
seller together and for his or her skills and speed in determination of a
fair price and execution of the trade.
d) Public offering
In a public offering the corporation or its investment banker offers the
securities to all the investor through public issue. Public placements
have the advantage of offering the corporation a wider base of security
holders, and corporations can usually raise larger sums of capital than
through a private placement.
i) Public offering on the basis of firm commitment
Usually investment banks take responsibility for selling the entire issue.
The agreement between the issuer and the banker is firm commitment in
which the issuing firm is guaranteed a specific price and is relieved of
the responsibility of marketing the securities. The two parties works
together to establish the right price for the securities and then negotiate
the underwriter discount, the investment bankers compensation for risk
taking and distribution. The issuing firm receives the issue price less
discount. If it turns out that the securities cannot be sold to public for at
least the discounted price, the investment banker absorbs a loss.
ii) Public offering on the basis of best efforts
When the issuing firm is not well known, the two parties may execute a
best efforts agreement that allows sharing of the risk; the investment
banker sells the securities at the best market price it can obtain. In this
method there lies no financial responsibility that if all the securities
cannot be sold. Recently, the government has sold a large number of
PSU shares under this route by inviting bids from investors. In the best
efforts offering the investment banker charges are typically more than
they would for a direct placement but less than they would have charged
for a fully underwritten public offering.
e) Registrar of the issue
The registrar mainly gives administrative support for the issue. The
agency collects the details on the number of applications received on
daily basis from the banker and prepares the list of applicants. After the
finalisation of allotment, the agency informs the applicants on allotment
of shares and sends the allotment advice/share certificate/refund order.
f) Credit rating
Credit rating was first introduced to rate commercial paper in 1990 by
CRISIL in India. They see rating as a barometer for financial strength
of a company or enterprise and a measure of investor protection. Credit
rating serves as a guiding factor for the prospective investors in fixed
return securities of corporate entities and helps in assessing the degree
of risk involved in repayment of principal and payment of return or
interest.
Debt instruments in India are necessarily to be rated by
the rating agency (particularly for non-convertible debentures,
commercial paper and other debt instruments). The three credit rating
agencies in India are:
i) Credit Rating Information Service or India Ltd. (CRISIL)
ii) Investment Information and Credit Rating Agency. (ICRA)
iii) Credit Analysis and Research Limited. (CARE)
iv) Duff & Phelps Credit Rating India Private Ltd. (DCR India)
1.6 SECONDARY MARKET
Once the issue is got through after the initial public offering and gets
listed in secondary markets, the investor (holder of the security) upon
deciding to sell the security, would offer it for sale to another investor in
one of the secondary markets. An investor who wants to buy the
security can make a bid for it in the secondary market. In the secondary
market, money flows from one investor to another in exchange for the
security. Table 8 and 9 shows the secondary market trading and FIIs
participation in secondary market.
The third party who arranges for transactions for public investor in the
secondary markets is the investment broker. Brokerage firms maintain
memberships on securities exchanges and other markets where
securities are traded. Once the investor places the order with the broker,
he goes to the stock exchange floor (now through computer systems) for
trading where he has to bargain with other prospective counterparty
broker. In exchange for their services, brokerage houses receive a
commission. Quite often a brokerage house also acts as an investment
banker in the primary markets. The bargains at floor trading lacks
transparency as the outcome of the order is normally known only at the
end of the trading session. In an automated trading system, the
transparency of trades completed for the investors is very high.
a) Organised stock exchange
An organised exchange is a physical place2 where stocks and bonds are
traded the exchange members. These specialists match buyers and
sellers and maintain an orderly market by trading for their own account
whenever there is an imbalance of buyers and sellers.
The market where outstanding securities are traded is referred to as the
secondary market or more popularly, the stock market. Presently, the
stock exchange in India consists of about 23 stock exchanges. The
stock exchanges are recognised by the central government and function
within the purview of the Securities Contracts (Regulation) Act, 1956,
bye-laws, and regulations duly approved by the central government.
b) Functions of stock exchanges
Providing a continuous market for the purchase and sale of securities.
 Providing a mechanism for determining a fair market price for
securities.
 Providing reports of all transactions and price quotations of
securities traded on the exchange.
2
The world is changing fast. Many stock exchanges all over the world are
computerising the trading and back-office functions. Shortly, we may not have any
floor-based trading. Already, all stock exchanges in India have abolished floor-based
trading though many of the U.S. and other developed markets follow dual system of
trading.
 Imposing some degree of standardisation regarding the release of
financial information by the companies whose securities trade on the
exchange.
The exchanges attempt to protect investors who maintain accounts at
member brokerage firms. They do this by regulating trading practices
and imposing financial standards upon member firms.
Activity 6
7) Read the stock market page of any economic daily for a week and
write down your observations?
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8) Visit BSE or NSE website and write down your brief observations
on the role of stock exchanges in developing secondary markets.
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1.7 ECONOMIC IMPORTANCE OF FINANCIAL MARKETS
The existence of both primary and secondary markets is important and
necessary for the growth and development of an economy. The primary
markets are of direct importance because they provide mechanism
through which companies can generate externally provided capital.
Companies need this capital to fund their growth and expansion. If all
companies have access to the capital market, then the markets provide
not only a vehicle for company's growth but also for the growth of the
economy. Economists agree that economic growth is desirable because
it is necessary to increase consumption opportunities and economic
welfare of the society that the economy serves. The primary markets are
therefore, beneficial to the economy because they provide an impetus to
fund the economic growth. In addition, they provide investor with
greater freedom in the number of choices of investments where they can
invest their savings. Thus the primary markets allows both for
increased investment opportunities and for increased standard of living.
For a primary market to be successful, however, investors, who buy the
newly issued securities must have the opportunities to sell them at a
later date should they need to raise cash or desire to shift their funds
into other investments. All well developed countries with market
economies have both the primary markets (for new issues) and
secondary markets (for trading in existing issues). To be induced to
invest in a security, investors desire that the security has some degree of
liquidity. The secondary market provides this liquidity. Even though
the corporation does not participate in the secondary market and obtains
no funds through it, the market for a corporation's existing securities is
quite important to firm. Should the firm ever need to issue additional
securities (for expansion, new project or diversification), conditions
prevailing in the secondary markets usually indicate how investors will
accept the firms new issue and at what price.
1.9 SUMMARY
Financial markets allow government, corporate sector and other
commercial units to raise capital for their activities. Capital is raised in
two broad ways. Intermediary institutions like financial institutions and
banks initially raise capital from public and others and then lend money
to the capital seekers. Capital seekers can also directly approach
investing public with the help of investment bankers/merchant bankers.
Capital seekers are also raising capital in other countries through
External Commercial Borrowings, Euro issues and ADR. Financial
products exchanged between the capital seekers and capital providers
are traded in secondary market and thus provide liquidity for the
products. This attracts a large number of investors to convert a part of
their savings into financial products. The direct interaction between the
two parties also improves efficient allocation of scarce capital in the
economy. The following chart summarizes our discussion.
Chart 1: Financial System: An overview
Surplus Sector
Financial System
Deficit Sector
(Investors)
(Capital Seekers)
Indirect Capital Flow
Direct Capital Flow
Financial Institutions
Primary
Secondary
Market
Market
Money
Stock
Market
Market
Financial Services Institutions
Debt, Equity
&
&
Regulators
Derivatives
1.10 SELF-ASSESSMENT QUESTIONS
1.
Briefly explain the role and functioning of financial market.
2.
Trace the developments of financial system in India over the last ten years
3.
Do you think Indian financial system discharges its basic function efficiently
and effectively? Explain
4.
List down money market and stock market related instruments and discuss
their basic characteristics.
5.
Write a brief note on debt market in India and explain why it is not popular
compared to equity market.
6.
What are the basic uses of derivatives to investors?
7.
Discuss the role of banking institutions in the financial system. Has their role
declined over the years because of increasing direct capital flow?
8.
Explain the new roles that banking companies can take in the financial system
compared to conventional pooling of savings and lending.
9.
Briefly discuss the role of RBI and SEBI in regulating financial system.
10. Compare Indian financial system with the financial system of few Asian
countries and show where we need to improve.
1.11 FURTHER READINGS
Meir Kohn, 1994, Financial Institutions and Markets, McGraw-Hill Inc.: New York
Peter S. Rose & James W. Kolari, 1995, Financial Institutions: Understanding and
Managing Financial Services, Richard D. Irwin: Chicago
Brian Anderton, 1995, Current Issues in Financial Services, Macmillan Press: London.
M.Y.Khan, 1997, Financial Services, Tata McGraw-HIll Publishing Co.: New Delhi.
M.A.Kohok, 1993, Financial Services in India, Digvijay Publications: Nashik.
Website: RBI Website
– http://www.rbi.org.in
BSE Website
– http://www.bseindia.com
NSE Website
– http://www.nseindia.com
1.11 STATISTICAL TABLES3
Table 1 : Sector-Wise Domestic Savings
(At current prices)
Rupees in crores
Household Sector
Year
1
Financial Physical
Savings Savings
2
3
Total
(2+3)
4
Private
Gross
Net
Public
Corporate
Domestic Domestic
Sector
Sector
Savings
Savings
(4+5+6)
5
6
7
8
1950-51
62
516
578
93
200
871
345
1960-61
456
680
1136
281
535
1952
1105
1970-71
1371
3000
4371
672
1528
6571
4009
1980-81
8610
10114
18724
2339
5818
26881
15145
1990-91
49640
55149 104789
15164
10057
130010
78932
1991-92
62101
41394 103495
20304
17290
141089
79118
1992-93
65367
57948 123315
19968
16399
159682
87553
1993-94
94738
54796 149534
29866
10533
189933
109050
1994-95
120733
68057 188790
35260
23412
247462
153640
1995-96
105719
95296 201015
59153
30834
291002
179876
1996-97
141661
79312 220973
62209
29886
313068
184677
1997-98
146777 123531 270308
65769
27429
363506
219757
1998-99
180346 149414 329760
68856
-8869
389747
227545
1999-00
206602 205914 412516
87234 -15494
484256
302835
2000-01
215219 239634 454853
81062 -36882
499033
297215
2001-02
247476 256689 504165
76906 -46186
534885
306588
2002-03
253255 315879 569134
94772 -15936
647970
397493
2003-04
313260 357516 670776
120730
29521
821026
541046
2004-05
318264 406846 725110
206363
68951
1000424
671501
2005-06
420841 445915 866756
268329
92263
1227348
848544
2006-07
467985 517837 985822
322242 133359
1441423
1006956
Note: 2005-06 values are Provisional; 2006-07 values are Quick Estimates
3
Source for all statistical tables is RBI website http://www.rbi.org.in
Table 2: Sector-Wise Gross Capital Formation
(Rupees crores)
Year
1
Household
Sector
Private
Sector
Public Sector Gross Capital Formation
At current
prices
At current
prices
At current
prices
At current
prices
At constant
prices
2
3
4
5
6
New Series (Base: 1999-2000)
1950-51
516
227
294
1037
.
1960-61
680
572
1259
2512
.
1970-71
3000
1107
3104
7211
.
1980-81
10114
3855
12994
26964
.
1990-91
55149
25575
56874
137598
.
1991-92
41394
40439
62052
143885
.
1992-93
57948
52431
68533
178912
.
1993-94
54796
53008
75923
183727
.
1994-95
68057
76139
94775
238971
.
1995-96
95296
123899
97749
316944
.
1996-97
79312
122491
103159
304961
.
1997-98
122531
134643
107830
365005
.
1998-99
149414
124122
122849
396384
.
1999-00
205914
143475
144610
509518
509518
2000-01
239634
109013
144638
508009
485049
2001-02
256689
123628
156537
551041
502115
2002-03
315879
140255
149399
619490
555291
2003-04
357517
180804
174579
737472
632621
2004-05
406846
331081
216962
995943
781583
2005-06
445916
477490
272002
1236800
923828
2006-07
517837
603014
321753
1492313
1056532
Note: 2005-06 values are Provisional; 2006-07 values are Quick Estimates
Table 3: Financial Assistance Sanctioned & Disbursed by All Financial
Institutions
Rupees in Crores
Year
IDBI
IFCI
ICICI
S
S
S
1970-71
70
32
44
1980-81
1691
207
314
1990-91
6278
2430
3744
1991-92
6590
2421
1992-93
9249
1993-94
SIDBI
IIBI
S
Total
S
S
D
108
254
160
19
696
2927
1848
2409
235
4107
19202
12810
4095
2846
278
6165
22395
16260
2348
5772
2909
294
12624
33196
23150
12086
3746
8491
3356
426
12882
40987
26624
1994-95
18199
5720 14528
4706
778
15344
59275
33568
1995-96
16476 10300 14595
6066
897
15828
64163
38650
1996-97
15634
7212 14084
6485
816
10410
54641
42657
1997-98
23982
7693 24718
7484
2061
11154
77092
53648
1998-99
23745
4445 32371
8880
2175
12080
83696
58330
1999-00
26967
2080 43523 10265
2338
16746
101918
68594
2000-01
26833
1767 55815 10821
2102
23211
120548
75364
2001-02
15868
9026
1322
11867
75089
58735
2002-03
5898
1960
-
10904
1207
8343
28311
26705
2003-04
3938
1392
-
8246
2412
24771
40759
30173
2004-05
10799
-
-
9091
.
10514
30404
21506
778 36229
S
Others
2005-06
-
-
-
11975
.
15691
27665
21146
2006-07
-
1050
-
11102
.
19107
31259
38653
2007-08
-
2551
-
16181
.
39983
58714
45981
S = Sanctioned; D = Disbursed;
Others include SCICI, IVCF, ICICI Venture, TFCI, LIC, UTI, GIC, SFCs and SIDCs
Table 4: Structure of Interest Rates (Commercial Banks)
Year
Call/Notice
Money
Rates
Commercial Bank Deposit Rates
1 to 3 Years
Lending
Rates
3 – 5 Years Above 5 Yrs SBI Advance
Rate
4
5
6
1
2
3
1970-71
6.38
6.00-6.50
7.00
7.25
7.00-8.50
1980-81
7.12
7.50-8.50
10.00
10.00
16.50
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
15.85
19.57
14.42
6.99
9.40
17.73
7.84
8.69
7.83
8.87
9.15
9.00-10.00
12.00
11.00
10.00
11.00
12.00
11.00-12.00
10.50 -11.00
9.00-11.00
8.50-9.50
8.50-9.50
11.00
13.00
11.00
10.00
11.00
13.00
12.00-13.00
11.50-12.00
10.50-11.50
10.00-10.50
9.50-10.00
11.00
13.00
11.00
10.00
11.00
13.00
12.50-13.00
11.50-12.00
10.50-11.50
10.00-10.50
9.50-10.00
16.50
16.50
19.00
19.00
15.00
16.50
14.50
14.00
13.00
12.00
11.50
2001-02
7.16
7.50-8.50
8.00-8.50
8.00-8.50
11.50
2002-03
5.89
4.25-6.00
5.50-6.25
5.50-6.25
10.75
2003-04
4.62
4.00-5.25
5.25-5.50
5.25-5.50
10.25
2004-05
4.65
5.25-5.50
5.75-6.25
5.75-6.25
10.25
2005-06
5.60
6.00-6.50
6.25-7.00
6.25-7.00
10.25
2006-07
7.22
7.50-9.00
7.75-9.00
7.75-9.00
12.25
2007-08
6.07
8.25-8.75
7.50-9.00
7.50-9.00
12.25
2008-09
7.67
9.50-10.00
8.75-9.75
8.75-9.75
13.75
Table 5: Structure of Interest Rates (Financial Institutions)
(Per cent per annum)
Year
Prime Lending Rates of Term Lending Institutions
IDBI
IFCI
ICICI
IIBI / IRCI
SFCs
1970-71
8.50
9.00
8.50
-
7.50-10.50
1980-81
14.00
14.00
14.00
9.15
12.00-16.00
1990-91
14.00-15.00
14.00-15.00
14.00-15.00
14.00-15.00
9.00-20.00
1991-92
18.00-20.00
18.00-20.00
18.00-20.00
18.00-20.00
9.00-20.00
1992-93
17.00-19.00
17.00-19.00
17.00-19.00
18.50-21.00 11.50-20.00
1993-94
14.50-17.50
14.50-17.50
14.50-17.50
14.50-17.50 11.50-20.00
1994-95
15.00
14.50-18.50
14.00-17.50
14.50-17.50 12.00-13.50
1995-96
16.00-19.00
16.00-20.00
14.00
15.50-18.50 12.00-13.50
1996-97
16.20
15.00-19.50
16.50
1997-98
13.30
14.50-18.00
14.00-14.50
1998-99
13.50
13.50-17.00
13.00
-
12.00-18.50
1999-00
13.60-17.10
13.50-17.00
12.50
14.00
12.00-18.00
2000-01
14.00
13.00
12.50
13.25
9.75-17.00
2001-02
11.50
12.50
12.50
11.50
9.50-16.75
2002-03
10.20
12.50
-
11.00
9.50-14.50
2003-04
8.90
12.50
-
8.50
9.50-14.51
2004-05
-
12.50
-
8.50
9.50-14.51
2005-06
-
12.50
-
8.50
9.50-13.00
2006-07
-
-
-
-
9.00-14.50
2007-08
-
-
-
-
9.50-15.00
17.00
12.00-27.50
12.50-13.50 12.00-18.00
Table 6: Major Monetary Policy Measures - Bank Rate, CRR & SLR
Bank Rate
Rate Effective Date
1
2
3.50
5/7/1935
3.00
28/11/1935
3.50
15/11/1951
4.00
16/05/1957
4.50
3/1/1963
5.00
26/09/1964
6.00
17/02/1965
5.00
2/3/1968
6.00
9/1/1971
7.00
31/05/1973
9.00
23/07/1974
10.00
12/7/1981
11.00
4/7/1991
12.00
9/10/1991
11.00
16/04/1997
10.00
26/06/1997
9.00
22/10/1997
10.50
19/03/1998
10.00
3/4/1998
9.00
29/04/1998
8.00
2/3/1999
7.00
2/4/2000
8.00
22/07/2000
7.50
17/02/2001
7.00
2/3/2001
6.50
23/10/2001
6.25
30/10/2002
Cash Reserve Ratio
Rate
Effective Date
1
2
5.00
5/7/1935
5.00
6/3/1960
5.00
11/11/1960
6.00
8/9/1973
4.00
28/12/1974
6.00
1/7/1978
7.25
27/11/1981
7.00
11/6/1982
8.50
12/11/1983
9.00
26/10/1985
10.00
24/10/1987
15.00
1/7/1989
15.00
8/10/1992
14.00
15/05/1993
14.50
11/11/1995
13.50
27/04/1996
12.00
6/7/1996
9.50
22/11/1997
10.50
17/01/1998
10.00
11/4/1998
9.50
6/11/1999
8.50
8/4/2000
8.25
29/07/2000
8.25
24/02/2001
7.50
19/05/2001
5.75
3/11/2001
4.75
16/11/2002
4.50
14/06/2003
4.75
18/09/2004
5.00
2/10/2004
5.25
23/12/2006
5.50
6/1/2007
5.75
17/02/2007
6.00
3/3/2007
6.25
14/04/2007
6.50
28/04/2007
7.00
4/8/2007
7.50
10/11/2007
7.75
26/04/2008
8.00
10/5/2008
8.25
24/05/2008
8.50
5/7/2008
8.75
19/07/2008
9.00
30/08/2008
Statutory Liquidity Ratio
Rate
Effective Date
1
2
20.00
16/03/1949
25.00
16/09/1964
26.00
5/2/1970
29.00
4/8/1972
32.00
8/12/1973
33.00
1/7/1974
34.50
25/09/1981
35.50
28/07/1984
36.50
8/6/1985
37.50
25/04/1987
38.00
2/1/1988
38.50
22/09/1990
38.50
29/02/1992
37.50
34.75
34.25
25.00
21/08/1993
16/10/1993
20/08/1994
25/10/1997
Table 7: Bonds Issued by Public Sector Undertakings *
(Rupees crore)
Year
Tax-Free Bonds
Taxable Bonds
Total (2+3)
1
2
3
4
1985-86
0
354
354
1986-87
900
775
1674
1987-88
1387
947
2334
1988-89
2412
456
2868
1989-90
3317
912
4229
1990-91
2545
3118
5663
1991-92
2469
3242
5711
1992-93
11
1052
1063
1993-94
1414
4172
5586
1994-95
1198
1872
3070
1995-96
547
1744
2291
1996-97
67
3327
3394
1997-98
570
2412
2983
1998-99
406
3957
4363
1999-00
400
8297
8697
2000-01
662
15969
16632
2001-02
274
14162
14436
2002-03
286
7243
7529
2003-04
-
5443
5443
2004-05
-
7591
7591
2005-06
-
4846
4846
2006-07
-
10325
10325
2007-08 P
-
13454
13454
P : Provisional.
* : Data include both public issues of bonds and privately placed bonds.
Table 8: New Capital Issues by Non-Government Public Limited Companies
(Rupees crores)
Year
1
Ordinary
Preference
shares
shares
Debentures
Total
No. of Amount No. of Amount No. of Amount
No. of
Issues
Issues
Issues
Issues
Amount
2
3
4
5
6
7
8
9
1970-80
363
769
158
67
23
212
1770
1048
1981-82
357
305
5
3
73
290
435
598
1982-83
570
259
8
2
66
445
644
706
1983-84
734
382
7
2
53
454
794
838
1984-85
402
363
5
0
64
693
471
1056
1985-86
758
898
9
1
83
846
850
1745
1986-87
424
1008
3
1
94
1573
521
2581
1987-88
174
1105
5
7
46
676
225
1788
1988-89
256
1034
6
3
79
2188
341
3225
1989-90
269
1220
4
8
134
5282
407
6510
1990-91
246
1284
3
13
115
3015
364
4312
1991-92
366
1916
3
2
145
4275
514
6193
1992-93
868
9953
1
1
171
9850
1040
19803
1993-94
983
9960
1
0
149
9370
1133
19330
1994-95
1548
17414
9
131
121
8871
1678
26417
1995-96
1591
11877
9
150
63
3970
1663
15998
1996-97
801
6101
5
75
32
4233
838
10410
1997-98
89
1162
1
4
12
1972
102
3138
1998-99
33
2563
3
60
12
2391
48
5013
1999-00
69
2753
0
0
10
2401
79
5153
2000-01
128
2608
2
142
9
3068
139
5818
2001-02
6
860
0
0
13
4832
19
5692
2002-03
5
460
0
0
4
1418
9
1878
2003-04
35
2471
0
0
3
1251
38
3722
2004-05
51
11452
0
0
3
1627
54
13079
2005-06
128
20899
1
10
2
245
131
21154
2006-07
114
29756
0
0
3
847
117
30603
2007-08
111
56848
1
5481
3
1309
115
63638
11479
197680
249
6162
1585
77605
14539
277725
Total
Table 9: Foreign Capital Flow
Year
1
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
A. Direct Investment
Rs.
Crore
2
174
316
965
1838
4126
7172
10015
13220
10358
9338
18406
29235
24367
19860
27188
39674
99985
130522
US $
million
3
97
129
315
586
1314
2144
2821
3557
2462
2155
4029
6130
5035
4322
6051
8961
22079
32435
B. Portfolio
Investment
Rs.
US $
Crore
million
4
5
11
6
10
4
748
244
11188
3567
12007
3824
9192
2748
11758
3312
6794
1828
-257
-61
13112
3026
12609
2760
9639
2021
4738
979
52279
11377
41854
9315
55307
12492
31713
7003
118288
29395
Total (A+B)
Rs. crore
6
185
326
1713
13026
16133
16364
21773
20014
10101
22450
31015
38874
29105
72139
69042
94981
131698
248810
US $
million
7
103
133
559
4153
5138
4892
6133
5385
2401
5181
6789
8151
6014
15699
15366
21453
29082
61830
Table 10: Turnover in Stock Exchange
Index
Year
BSE & NSE
Turnover
Index
Stock
Stock
Futures Options
Futures
Options
1994-95
69555
1995-96
117351
1996-97
418787
1997-98
577839
1998-99
726473
1999-00
1524078
2000-01
2339542
2001-02
820459
4038
0
0
0
2002-03
932061
22758
3844
51968
25279
2003-04
1602155
45763
9249
287176
100154
2004-05
1658788
561018
52816
1311110
217539
2005-06
2385629
785747
124240
1484269
168839
2006-07
2901470
1513760
338472
2791697
180253
2007-08
5129894
2594996
791906
3834483
193795
Note: 1. Derivative volumes include both BSE and NSE volumes
Note: 2. Derivative volumes represent notional value of contract