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ROLL NO. 32 49

Consisting of a variety of institutions, markets, and instruments related in a systematic manner. It provides the principal means by which savings are transformed into investment. This chapter provides a conceptual framework for understanding how the financial system work such as: Functions of the financial systems Financial markets Financial intermediaries Regulatory system

Payment system Pooling of funds Transfer of resources Risk management Price information for decentralized decision-making. Dealing with the incentive problem

A financial market is a market for creation and exchange of financial assets. Functions of financial markets: Facilitate price discovery. Provide liquidity to financial assets. Considerably reduce the cost of transacting.

By the type of financial claim. By the maturity of claims. Based on whether the claims represent new issues or outstanding issues. By the timing of delivery. By the nature of its organizational structure.

Financial intermediaries are firms that provides services and products that customers may not be able to get more efficiently by themselves in financial markets. Financial intermediaries seem to offer several advantages: Diversification Lower transaction cost Economies of scale Confidentiality Signaling benefit

Reserve Bank Of India

Commercial Banks

Developmental Financial Institutions

Insurance Companies

Other Public Sector Financial Institutions

Mutual Funds

Non-Banking Financial Corporations

Public Sector Banks

All India Institutions

Life Insurance Corporation Of India


Public Sector Mutual Funds

Public Sector Firms

Private Sector Banks

State Level Institutions

Private Sector Insurance Companies


Private Sector Mutual Funds

Private Sector Firms

General Insurance Corporation Of India


As a maker and enforce of laws in a society, the government has the responsibility for regulating the financial system. The two major regulatory arms of the government of India are: The Reserve Bank of India(RBI) The Securities Exchange Board of India(SEBI)

As the central banking authority of India, the Reserve Bank of India performs the following traditional functions of the central bank: It provides currency and operates the clearing system for the banks. It formulates and implements monetary and credit policies. It functions as the bankers bank. It supervises the operations of credit institutions. It regulates foreign exchange transactions. It moderates the fluctuations in the exchange value of the rupee.

The Securities Exchange Board of India has been entrusted with the responsibility of dealing with various matters relating to the capital market. SEBIs principal tasks are to: Regulate the business in stock exchanges and any other securities markets. Register and regulate the capital market intermediaries. Register and regulate the working of mutual funds. Promote and regulate self-regulatory organizations. Prohibit fraudulent and unfair trade practices in securities markets. Promote investors education and training of intermediaries of securities markets.

Prohibit insider trading in securities. Regulate substantial acquisition of shares and takeovers of companies. Perform such other functions as may be prescribed.

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