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Indian Financial System

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Indian Financial System

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  • June 2013
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Indian Financial System
Introduction
Financial system plays a very important role in the development of the country. It is through the financial system that funds get transferred from funds surplus to funds deficient sectors of the country. The fund surplus parts of the economy essentially include households while fund deficient parts of the economy include businesses and government. The financial system acts as an intermediary through which funds are channelized from one part of the economy to another. Indian Financial System

The financial system in India has progressed from nascence post independence. But, it was only the banking sector which was the sole representative of the financial system in the country. The other components viz. Capital markets, Insurance etc were visibly absent in the early years. Also, the banking sector was strongly controlled by the government. The control became even stronger after the nationalisation of banks in 1969. Infact the successive Governments looked upon the financial system as an easily available mechanism for raising money (Hanson& Kathuria). It’s only in the 80s and the 90s that we saw a flourish in the other segments of the system. There were strict regulations on the interest rates on both the deposit as well as the lending side of the business. However, even with the tight restrictions imposed on the interest rates, the depth of the Indian financial system was comparable with other countries of the world which were considerably higher on the growth curve in terms of the maturity of the markets as well as GDP. The Broad money to GDP ratio in 1980 was as high as 36% comparable to some of the middle income countries (World Bank, 1989). Similar was the case in equity markets as well. The Market capitalisation to GDP ratio in 1985 was almost the same as economy like Korea which had a much higher GDP at that point of time (World Bank, 1989). The Financial system has progressed substantially post the reforms in...