Capital markets in India

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First, the country has not strengthened its capital markets fully. Currently, the National Stock Exchange (NSE) has not reached out to retail businesses and institutional investors properly. Furthermore, the stock market is dependent on metro cities; only about ten cities account for eighty percent of the trading at the NSE. This leaves many rural and semi rural areas untapped (Mohan, 2006).

It has been shown that the Indian people have a very good savings culture. If the retail sector can be engaged, the capital markets will have better prospects for growth. Such an approach is quite imperative especially because the bond markets are growing at very good rates (Sharma & Chandan, 2006).

Financial literacy is another big problem in Indian capital markets. A number of people are willing to invest, but few of them are fully informed about financial instruments. Some of them have committed themselves to an investment, only to realize that they had not been told about the full risks entailed in the venture.

For the Indian capital markets to grow, people need to know the benefits, risks, durations and volatilities of various types of investments before that can commit. Stakeholders have the responsibility of making this information available to them in an easily accessible and understandable form (Farrell et al., 2006).

When compared to other capital markets of the world, it is a given fact that transaction costs in India are much higher than they are in similar economies. Consequently, this acts as a barrier that limits potential trading partners from participating in the market.

The country is yet to take full advantage of the benefits of technology in order to cut down on some of these transaction costs. India has the opportunity to make their markets the ideal investment destination if it can work on this glitch.

This particular capital market also lacks new products innovation. One particular sector that needs to be improved is the area of financial derivatives. Investors in other parts of the world tend to rely on financial derivatives in order to protect or hedge out their investments against risk (Bekaert et al., 2003).

This can provide a new avenue for revenue growth and could push the boundaries of the Indian Capital markets to other parts of the world through foreign investors.

Governance, regulation and risk management are also other sectors that can be improved in the Indian capital markets. Internationalization is fast becoming a reality for emerging economies. If India is competing internationally, it needs to clear out current structural bottlenecks.

The country needs to have governance and risk management standards that are well streamlined. For any stock market to function efficiently, it needs to have a mechanism for providing resilience and stability to those concerned. Consequently, India needs to work on its current procedures and models so as to align them with international best practice standards (Shirai, 2002).

India’s capital markets have been performing well irrespective of the global financial crisis (Gorham et al., 2005). This is indicative of the potential in these markets in the future. However, for India to reach to that level, it needs to know its weaknesses and work on them. I hope that these few highlights will help in understanding the Indian capital markets further.

References

Bekaert, G., Lundblad, C. & Campbell, R. (2003). Equity market liberalization in emerging markets. Federal Reserve Bank of Louisiana report, 23

Farrell, D., Lund, S., Greenberg, E., Rosenfeld, J. & Morin, F. (2006). Accelerating India’s growth through financial sector reform. San Francisco: MGI publishers

Gorham, M., Thomas, S. & Shah, A. (2005). India: The crouching tiger. Web.

Mohan, R. (2006). Monetary policy and exchange rate frameworks: the Indian experience. Bombay: McMillan

Sharma, V. & Chandan, S. (2006). Developing corporate bond markets in Asia: The corporate debt market in India. TGI Report, Basel, 46

Shirai, S. (2002). Have India’s financial market reforms changed corporate financing patterns? Asian Development bank report, Tokyo, 34

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Capital markets in India

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