Financial markets are marketplace for raising capital and trading financial assets like bonds, stocks, foreign exchange, and derivatives.
Issues with Financial markets in India
- Government securities (G-Secs) Market:
- Lack of Diversity: Liquidity is concentrated in few securities, thinning out for longer maturities.
- Secondary market trading is dominated by banks and Primary Dealers, with a low Turnover Ratio (Annual turnover to outstanding stock of securities).
- Money Market:
- Call Money Market: Dwindling liquidity in call money market.
- ‘Call Money’ is borrowing or lending of funds for 1 day.
- Term Money Market: Over-reliance on overnight market and lack of development of a risk-free term structure vital for benchmarking prices of interest rate products.
- ‘Term Money’ refers to borrowing/lending of funds for a period exceeding 14 days.
- Asymmetries between different money market rates: E.g. in the call money rate, the market repo rate and Tri Party Repo Dealing System (TREPS) rate.
- A tri-party repo is a repurchase agreement (repo) where a third party acts as an intermediary between borrower and lender, managing aspects like collateral selection, payment, and settlement.
- Call Money Market: Dwindling liquidity in call money market.
- Foreign Exchange (FX) Market: Divergence in pricing for the small and large customers and non-compliance with regulatory mandates ensuring transparency.
- Derivatives Market: Remains small in absolute terms and relative to GDP with Lack of diversity and limited liquidity.
Way Forward
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