Derivatives Market: Meaning, History & Origin, Market: Futures, Options and Hedging

Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, currencies, or market indices. They are used for hedging risk, speculation, and arbitrage opportunities. Common types include futures, options, swaps, and forwards. Derivatives help investors manage price fluctuations and uncertainties in financial markets. They are traded either on exchanges (standardized contracts) or over-the-counter (customized contracts). While derivatives can enhance portfolio returns, they also involve high risk and leverage, making them suitable for experienced investors and institutions looking to manage financial exposure effectively.

Important Features of Derivatives:

  • Underlying Asset Dependency

Derivatives derive their value from an underlying asset, which can be stocks, bonds, commodities, currencies, interest rates, or indices. The price of a derivative fluctuates based on changes in the value of the underlying asset. This dependency makes derivatives useful for hedging risks and speculative investments. Investors use derivatives to predict price movements and minimize losses caused by volatility in the market, making them essential financial instruments for risk management.

  • Leverage and Margin Trading

Derivatives allow traders to control a large market position with a relatively small investment, known as leverage. Investors use margin trading, where they deposit a fraction of the total trade value as collateral. While leverage can amplify gains, it also increases the risk of significant losses if the market moves unfavorably. Proper risk management is crucial, as excessive leverage can lead to margin calls and financial instability for investors.

  • Risk Management and Hedging

One of the primary functions of derivatives is risk management. Businesses and investors use derivatives to hedge against unfavorable price movements in their portfolios or business operations. For example, companies involved in international trade use currency derivatives to protect against exchange rate fluctuations. Similarly, farmers and commodity traders use futures contracts to lock in prices, ensuring predictable revenues despite market volatility.

  • Speculative Trading Opportunities

Derivatives attract investors seeking speculative gains by predicting market price movements. Traders buy or sell derivatives based on expected price changes in the underlying asset. Since derivatives require less capital due to leverage, they enable higher returns on investment. However, speculation involves high risks, and incorrect predictions can lead to substantial financial losses, making it important for traders to have market expertise and risk management strategies.

  • Liquidity and Market Efficiency

The derivatives market is highly liquid, allowing investors to buy and sell contracts easily. Standardized contracts traded on exchanges like NSE and BSE ensure price transparency and smooth transactions. The presence of multiple buyers and sellers improves market efficiency, helping in accurate price discovery. Additionally, derivatives help prevent market manipulation, as they reflect real-time expectations of future price movements, making them vital for financial markets.

  • Standardized and Over-the-Counter (OTC) Trading

Derivatives are traded in two forms: exchange-traded derivatives (ETDs) and over-the-counter (OTC) derivatives. ETDs are standardized contracts traded on regulated exchanges like NSE and BSE, ensuring transparency and reduced counterparty risk. OTC derivatives, on the other hand, are customized agreements between two parties, offering flexibility but involving higher risks, including default risk due to the absence of centralized clearing.

  • Contractual Nature and Expiry

Derivatives operate under legally binding contracts with predefined terms and conditions, such as expiry date, contract size, strike price, and settlement method. Every derivative has a fixed expiration date, after which it must be settled. Investors choose between physical settlement (actual delivery of assets) or cash settlement (payment based on price differences). The fixed timeframe makes derivatives time-sensitive, requiring careful monitoring and execution.

  • Volatility Sensitivity

Derivatives are highly sensitive to market volatility, as their value depends on price movements in the underlying asset. Increased economic uncertainties, political events, or financial crises can cause rapid changes in derivative prices. While this volatility presents profit opportunities, it also raises financial risks for traders. Investors must analyze market trends, use risk management tools, and set stop-loss limits to protect their investments from unexpected price swings.

History & Origin of Derivatives Market:

The derivatives market traces its origins back to ancient times, with early forms of derivatives existing in ancient Mesopotamia, where merchants used forward contracts to guarantee prices for future transactions in commodities like grain. However, the modern derivatives market began in the 17th century in Japan with the origin of rice futures trading on the Dojima Rice Exchange in Osaka. This marked the formalization of trading contracts that could hedge against price fluctuations.

The concept of derivatives evolved over time, especially in the United States in the 19th century, where futures contracts for agricultural products like corn, wheat, and cotton were developed to manage price risks. The establishment of the Chicago Board of Trade (CBOT) in 1848 further shaped the growth of the futures market.

The 1970s saw significant growth in financial derivatives, particularly with the introduction of financial futures and options contracts. The Chicago Mercantile Exchange (CME) pioneered the first financial futures market in 1972, and the options market expanded with the creation of the Chicago Board Options Exchange (CBOE) in 1973. Over the following decades, financial innovation and technology advancements led to the development of complex derivatives, including swaps and credit derivatives, which transformed the derivatives market into a global financial industry.

Examples of Derivatives Market:

  • Stock Futures and Options Market

Stock futures and options are popular derivatives where traders speculate on the future price movements of stocks. For example, if an investor believes Reliance Industries’ stock price will rise, they can buy a Reliance Futures contract. If the price increases, they profit; if it drops, they incur losses. Similarly, options allow investors to buy or sell stocks at a predetermined price before expiry. Stock derivatives help in hedging risk and increasing liquidity, allowing investors to benefit from price movements without holding the actual stock. These contracts are actively traded on exchanges like NSE and BSE in India.

  • Commodity Derivatives Market

Commodity derivatives allow traders to hedge against price fluctuations in raw materials and agricultural products. For example, a farmer expecting a decline in wheat prices can sell wheat futures to lock in a price. Similarly, manufacturers buy oil futures to hedge against rising crude oil prices. These derivatives reduce uncertainty in agriculture, metals, and energy sectors. Commodity futures are actively traded on platforms like the Multi Commodity Exchange (MCX) in India, helping farmers, traders, and industries manage price volatility and ensure stable revenue streams.

  • Currency Derivatives Market

Currency derivatives help businesses and investors hedge against exchange rate fluctuations. For instance, an Indian exporter expecting the USD to weaken against INR can buy a currency futures contract to lock in a fixed exchange rate. This protects them from potential forex losses. Similarly, investors trade EUR/INR or USD/INR futures for speculative gains. The NSE and BSE currency derivatives segments facilitate such trades, providing liquidity and risk management tools for companies involved in international trade and finance.

  • Interest Rate Derivatives Market

Interest rate derivatives help businesses and investors manage interest rate risks. For example, banks use interest rate swaps to hedge against rising borrowing costs. Suppose a company has a floating-rate loan but expects interest rates to rise; it can enter an interest rate swap to convert it into a fixed-rate loan, ensuring stable repayment costs. Governments and corporations also use bond futures and swaps to manage debt portfolios. In India, interest rate derivatives are actively traded on exchanges like NSE and BSE, helping institutions navigate changing interest rate environments.

  • Credit Derivatives Market

Credit derivatives protect lenders from default risks. One common instrument is the Credit Default Swap (CDS), where an investor buys insurance against a borrower defaulting on a loan or bond. For example, if a bank has issued loans to a financially unstable company, it can purchase a CDS contract to hedge against non-payment risk. If the borrower defaults, the seller of the CDS compensates the buyer. Credit derivatives are widely used in global financial markets to manage credit exposure and reduce systemic risk in banking and lending institutions.

Derivatives Market:

  • Futures Market

The futures market involves buying and selling standardized contracts to buy or sell an asset at a predetermined price on a specified date. These contracts are typically used for hedging or speculating on the price movements of commodities, stocks, or financial instruments. For example, if a farmer expects a fall in wheat prices, they may sell wheat futures to lock in a price. Futures markets offer high liquidity and help participants manage price risks. They are primarily traded on exchanges like NSE and MCX, providing a platform for price discovery and risk management.

  • Options Market

The options market involves the trading of options contracts that give the holder the right, but not the obligation to buy or sell an underlying asset at a set price before a specific expiration date. There are two types: call options (right to buy) and put options (right to sell). Investors use options to hedge against potential price movements or to speculate. For example, buying a call option on a stock allows the buyer to profit if the stock price increases. The options market offers flexibility and is actively traded on stock exchanges like the NSE.

  • Hedging

Hedging is a risk management strategy used to offset potential losses in investments or business operations by taking an opposite position in a related asset or market. For instance, a company that imports goods can use currency futures to hedge against fluctuations in exchange rates. In the commodity market, producers and consumers use futures contracts to lock in prices and minimize risks from price volatility. Hedging helps businesses and investors reduce uncertainty and protect against adverse price movements, ensuring more predictable financial outcomes in volatile markets.

Commodities Market, Meaning, History and Origin, Features, Classification

Commodities market in India refers to the trading of raw materials and primary agricultural products like gold, silver, crude oil, metals, and agricultural commodities. It plays a crucial role in price discovery, risk management, and ensuring liquidity. The Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) are the two major exchanges facilitating commodities trading in India. These markets allow hedging against price fluctuations and provide opportunities for investors to diversify their portfolios. The commodity derivatives market includes futures and options contracts, which help participants manage risks related to price volatility. The commodities market contributes to India’s economic development by improving market efficiency and supporting both producers and consumers.

History and Origin of Commodities Market:

The origin of the commodities market can be traced back to ancient civilizations, where the exchange of goods, primarily agricultural products, and raw materials was a fundamental part of trade. The commodities market, as we know it today, has evolved significantly over centuries, driven by the need for structured trading, price discovery, and risk management.

  • Ancient Civilizations and Early Trading

The concept of commodities trading can be traced back to Mesopotamia around 3000 BCE, where grain was traded. The ancient Sumerians used clay tablets to record transactions, which are considered the earliest forms of futures contracts. These early forms of trade were often linked to agricultural products such as grains, livestock, and metals. In Egypt and Greece, similar trade practices evolved, with local markets developing around major cities to facilitate the exchange of agricultural goods and resources.

  • Emergence of Futures Contracts

The formalization of futures contracts began in Japan in the 17th century. The Dojima Rice Exchange was established in 1697 in Osaka, Japan, marking the world’s first futures market. Farmers and merchants used this exchange to enter into contracts that allowed them to lock in future prices for rice. This practice was crucial for both producers, who wanted to secure income, and merchants, who sought to ensure consistent supply. The Dojima Exchange set the foundation for futures trading, which is now a cornerstone of modern commodities markets.

  • Commodities Market in the United States

In the United States, the history of commodities markets began in the early 19th century. The Chicago Board of Trade (CBOT) was established in 1848, and it became one of the most influential commodity exchanges globally. Initially, the exchange focused on agricultural products such as corn, wheat, and oats, vital to the U.S. economy at the time. The CBOT introduced standardized contracts for the trading of these commodities, which helped promote transparency, liquidity, and price discovery.

The futures contracts introduced by the CBOT allowed producers to hedge against price fluctuations, providing a financial safety net. Over time, this concept expanded to include a broader range of commodities, including energy products like oil and natural gas, as well as precious metals such as gold and silver.

Evolution of the Modern Commodities Market

The growth of the global economy and advances in technology contributed significantly to the expansion of commodities markets. The creation of electronic trading platforms and online exchanges allowed for quicker execution of trades and greater market participation. In India, the modern commodities market began to take shape in the late 20th century.

National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX) were established in India in 2003 and 2004, respectively, to provide structured platforms for trading a variety of commodities, including metals, energy, and agricultural goods. These exchanges were designed to help manage price risks, ensure liquidity, and contribute to the overall development of India’s commodity market.

Features of Commodities Market:

  • Variety of Commodities:

The commodities market in India deals with a wide range of raw materials and primary products. These include agricultural commodities like wheat, rice, and cotton, and non-agricultural commodities such as gold, silver, crude oil, and industrial metals like copper, aluminum, and steel. The diversity of commodities allows traders and investors to participate in various sectors and manage their exposure to different risks.

  • Physical and Derivatives Market:

The commodities market consists of two segments: the physical market and the derivatives market. The physical market involves the direct buying and selling of the commodities, while the derivatives market includes contracts such as futures and options, which allow traders to hedge against price fluctuations. The derivatives market enables participants to lock in prices for future delivery, thus offering protection against price volatility.

  • Price Discovery and Transparency:

One of the main functions of the commodities market is price discovery. Through active trading and supply-demand dynamics, the market establishes transparent and fair prices for commodities. The prices in the market reflect real-time economic conditions, geopolitical factors, and other relevant influences, providing both producers and consumers with valuable insights into market trends and price movements.

  • Hedging Opportunities:

Commodities markets offer participants a chance to hedge against price volatility and uncertainties. For instance, producers like farmers or mining companies can use futures contracts to lock in a specific price for their products, protecting themselves from adverse price movements. Similarly, importers and exporters can hedge against exchange rate fluctuations or price changes in global markets.

  • Regulation and Oversight:

The commodities market in India is regulated by organizations like the Securities and Exchange Board of India (SEBI) and the Forward Markets Commission (FMC). These regulatory bodies ensure that the market operates with transparency, fairness, and integrity, protecting the interests of all participants. Exchanges such as MCX and NCDEX play a central role in maintaining order and enforcing rules for smooth market operations.

  • Liquidity:

The commodities market provides liquidity, enabling traders to buy or sell commodities quickly and efficiently. Liquidity is essential for price discovery and helps investors enter or exit positions without significant price distortion. With high liquidity, participants are assured that they can execute their trades at prevailing market prices, making the market more attractive for both institutional and retail investors.

Classification of Commodities Market:

  • Physical (Spot) Market

The physical or spot market is where commodities are bought and sold for immediate delivery and payment. Transactions occur on the spot, meaning buyers pay and take possession of the goods right away. This market deals with tangible commodities such as agricultural produce, metals, and energy products. Prices are determined based on current supply and demand conditions. Spot markets are typically used by manufacturers, traders, and consumers who need physical delivery of goods. These markets operate through auction systems, trading floors, or over-the-counter (OTC) channels, and they form the foundation for futures and derivatives pricing.

  • Futures Market

The futures market involves contracts to buy or sell commodities at a future date at a predetermined price. It allows buyers and sellers to hedge against price fluctuations by locking in prices in advance. No physical exchange of goods occurs at the time of the agreement. This market is essential for risk management, price discovery, and speculation. Standardized contracts are traded on exchanges like MCX or NCDEX. The futures market is regulated to ensure transparency, and it attracts investors, producers, exporters, and large buyers looking to mitigate risks related to price volatility in commodity markets.

  • Over-the-Counter (OTC) Market

The OTC commodities market allows for direct trading between two parties without exchange involvement. These contracts are customized in terms of volume, delivery date, and settlement terms, catering to specific needs of large players like corporates or institutional buyers. Since OTC markets are not standardized, they offer flexibility, but also carry higher counterparty risk. Commonly traded OTC commodities include crude oil, metals, and grains. Though not as regulated as exchange-traded markets, OTC trading plays a significant role in global commodities pricing and is often used for complex financial strategies or hedging requirements.

  • Exchange-Traded Market

This market refers to commodity transactions that occur through regulated exchanges such as MCX (Multi Commodity Exchange) or NCDEX (National Commodity & Derivatives Exchange) in India. These markets offer transparency, standardization, and reduced counterparty risk due to regulatory oversight. Commodities are traded in standardized contract sizes and delivery specifications. Prices are determined through market dynamics and published in real-time. Traders, investors, and hedgers participate actively in this platform, making it a key part of the financial system. Exchange-traded commodity markets promote efficient price discovery, liquidity, and facilitate fair and transparent commodity trading.

Introduction, Characteristics, Types of Commodity Derivatives

Commodity Derivatives are financial instruments whose value is derived from the price of underlying physical commodities such as gold, oil, wheat, or cotton. These derivatives include futures and options contracts that allow buyers and sellers to trade a specified quantity of a commodity at a predetermined price and date in the future. Commodity derivatives help in hedging against price volatility, ensuring price stability for producers, traders, and investors. In India, commodity derivatives are traded on regulated exchanges like MCX and NCDEX under SEBI’s supervision. They play a crucial role in efficient price discovery, liquidity enhancement, and overall market risk management.

Characteristics of Commodity Derivatives:

  • Underlying Asset Based

Commodity derivatives derive their value from underlying physical commodities such as metals (gold, silver), energy (crude oil, natural gas), or agricultural products (wheat, cotton). The price of the derivative is closely tied to the market price of the actual commodity. Any fluctuation in the spot market directly affects the value of the contract. This strong linkage makes these instruments ideal for businesses and investors seeking exposure to or protection from changes in commodity prices, without having to deal with the physical goods.

  • Standardized Contracts

Commodity derivatives traded on exchanges like MCX and NCDEX are standardized in terms of quantity, quality, and delivery time. Standardization ensures uniformity and comparability, making it easier for traders and investors to enter or exit positions. It also facilitates better liquidity and transparency in the market. Standard contracts reduce ambiguity, simplify legal enforcement, and enhance the efficiency of commodity trading. This structure makes it more accessible for retail and institutional investors while minimizing the risk of disputes over contract terms.

  • Hedging Tool

One of the primary purposes of commodity derivatives is hedging. Producers, manufacturers, and traders use these instruments to protect themselves from adverse price movements. For example, a farmer expecting a harvest in three months can lock in a price today through a futures contract. Similarly, a company that needs a commodity in the future can hedge against price increases. By providing a means of risk management, commodity derivatives contribute to greater financial stability in sectors reliant on raw materials.

  • Speculative Nature

Apart from hedgers, commodity derivatives attract speculators who seek to profit from price fluctuations without any intention of owning or delivering the actual commodity. These market participants add liquidity and depth, improving the efficiency of the market. However, excessive speculation may lead to volatility and price distortions. Proper regulation by authorities like SEBI ensures that speculation does not disrupt the fair functioning of the market. While risky, speculative trading plays an essential role in balancing market demand and supply.

  • Leverage Opportunities

Commodity derivatives allow traders to take large positions with relatively small capital due to the use of margin trading. This leverage enables significant potential gains, but also magnifies potential losses. It attracts investors seeking high returns in a short time frame. Exchanges set initial and maintenance margin requirements to ensure financial discipline. While leverage increases market participation and flexibility, it must be used cautiously, especially by retail traders, due to the increased risk of losses during volatile market conditions.

  • Expiry and Settlement

Every commodity derivative contract has a specified expiry date and settlement method. Settlement may be done through physical delivery of the commodity or cash settlement, depending on the exchange and contract type. On the expiry date, the contract must be settled, and any open positions are squared off. This time-bound nature distinguishes derivatives from other long-term investment instruments. Settlement mechanisms ensure contract performance and maintain market integrity, offering traders predictability and enforcing accountability in the trading process.

  • Price Discovery Mechanism

Commodity derivatives play a crucial role in the price discovery of commodities. Through the forces of supply and demand on trading platforms, the futures market reflects the collective expectations of market participants about future prices. This process helps producers, consumers, and policymakers make informed decisions. Transparent trading and wide participation improve the accuracy of price signals. Therefore, derivatives markets not only reflect current economic conditions but also help forecast future trends, adding to market efficiency and planning.

  • Regulated Environment

In India, commodity derivatives are regulated by the Securities and Exchange Board of India (SEBI) to ensure fair trading practices, investor protection, and market stability. Exchanges must follow strict compliance procedures, and participants are required to meet financial and operational criteria. Regulations limit manipulation, control volatility, and foster confidence in the market. With evolving laws and increasing digital monitoring, India’s commodity derivatives market has become more robust, transparent, and investor-friendly, encouraging greater participation from both domestic and global players.

Types of Commodity Derivatives:

  • Futures Contracts

Futures are standardized contracts that obligate the buyer to purchase, and the seller to deliver, a specific quantity of a commodity at a predetermined price on a future date. These contracts are traded on recognized commodity exchanges like MCX and NCDEX. Futures are widely used for hedging price risks by producers and consumers, as well as for speculation by traders. They offer liquidity, transparency, and a mechanism for price discovery. Settlement can be done via physical delivery or cash, depending on the contract terms and market practices. Futures are the most commonly traded commodity derivatives in India.

  • Options Contracts

Options on commodities give the holder the right, but not the obligation, to buy or sell a specific commodity at a predetermined price on or before a set date. There are two types: Call options (right to buy) and Put options (right to sell). Unlike futures, options limit the loss to the premium paid, making them less risky. They are useful for hedging against adverse price movements with lower upfront costs. In India, options on commodities are gaining popularity, and are regulated by SEBI and traded on commodity exchanges, offering flexibility and strategic risk management to market participants.

  • Swaps

Commodity swaps are over-the-counter (OTC) contracts between two parties to exchange cash flows based on the price movements of an underlying commodity. Typically, one party pays a fixed price while the other pays a floating market price for a specified period. Swaps are used by companies to manage exposure to commodity price fluctuations, especially in energy and metals. Unlike futures and options, swaps are not traded on exchanges and carry counterparty risk. In India, commodity swaps are relatively less common but are significant in global markets for long-term hedging and risk management strategies.

Key differences between Stock Market and Commodities Market

Stock Market is a platform where shares of publicly listed companies are bought and sold. It enables companies to raise capital by issuing equity, while providing investors the opportunity to earn returns through price appreciation and dividends. The stock market plays a vital role in economic development by facilitating investment and wealth creation. In India, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are major stock exchanges. Market participants include retail investors, institutional investors, and traders. The stock market operates under strict regulations set by SEBI to ensure transparency, investor protection, and orderly trading practices.

Characteristics of Stock Market:

  • Liquidity

The stock market offers high liquidity, allowing investors to quickly buy or sell securities with minimal price fluctuation. Liquidity ensures that market participants can enter or exit positions with ease, encouraging more participation. Highly liquid markets reduce the risk of holding stocks and promote investor confidence. Stock exchanges like NSE and BSE maintain continuous trading systems and order-matching mechanisms to ensure seamless transactions. Liquidity also helps in accurate price discovery, ensuring that stocks are traded at fair market value based on real-time demand and supply. This makes stock investing more accessible and less risky.

  • Transparency and Regulation

The stock market operates under strict regulation and supervision by the Securities and Exchange Board of India (SEBI). SEBI ensures transparency, investor protection, and fair trading practices. All listed companies are required to disclose financial results, shareholding patterns, and material information regularly. Real-time data on prices, volumes, and market movements are available to the public. These measures foster trust and credibility in the market. Transparency helps investors make informed decisions and keeps manipulative practices like insider trading and market rigging in check, ensuring the integrity and stability of the capital market ecosystem.

  • Price Discovery

Price discovery is a core characteristic of the stock market. It refers to determining the correct price of a stock based on demand and supply dynamics. Prices fluctuate continuously as investors react to company performance, economic indicators, interest rates, global trends, and news. Efficient price discovery ensures that stocks are traded at their intrinsic value, benefiting both buyers and sellers. The open and competitive nature of stock exchanges helps in establishing fair market prices. This feature is crucial for investment analysis, wealth management, and decision-making for all market participants including institutions and retail investors.

  • Risk and Return

The stock market offers potentially high returns but is also associated with risk. Stock prices are volatile and may be affected by factors like economic downturns, company performance, political events, or investor sentiment. While long-term investors may benefit from capital appreciation and dividends, short-term traders face uncertainty. Understanding risk is crucial in building a balanced portfolio. Risk-return tradeoff plays a key role in investment strategies, influencing decisions regarding asset allocation and diversification. Investors must conduct research or seek expert advice to manage risks effectively while pursuing optimal returns in the dynamic stock market environment.

  • Market Indices

Market indices like Nifty 50 and Sensex represent a group of selected stocks and serve as benchmarks to measure overall market performance. These indices reflect investor sentiment and are widely used by fund managers, analysts, and policymakers. Indices help in comparing the performance of a stock, mutual fund, or portfolio with the market. They also serve as the basis for index funds and derivatives trading. Regular updates and reviews ensure the relevance of index composition. By tracking indices, investors can assess broader economic trends and take informed investment decisions based on market direction.

  • Volatility

Volatility refers to the degree of price fluctuation in the stock market. It can be caused by economic reports, corporate earnings, geopolitical tensions, policy announcements, and investor behavior. While high volatility may present profit opportunities for traders, it also increases risk. Market volatility is measured by indicators like the India VIX Index. Stock exchanges use tools like circuit breakers to control extreme fluctuations and maintain market stability. Understanding volatility is essential for risk management and setting realistic return expectations. Both short-term traders and long-term investors must adapt strategies according to market volatility levels.

  • Accessibility

Modern stock markets are highly accessible due to digital platforms and mobile trading apps. Anyone with a demat and trading account can invest or trade in stocks, ETFs, or mutual funds from anywhere. Stockbrokers offer online research, portfolio management tools, and educational resources to assist investors. Lower transaction costs, faster settlements, and real-time updates have made equity markets more inclusive. Regulatory reforms like e-KYC and Aadhaar-based onboarding have further simplified access. As a result, participation from small investors and millennials has increased, promoting financial inclusion and broader capital market development in India.

  • Wide Range of Instruments

The stock market offers a wide variety of instruments such as equities, derivatives (futures and options), ETFs, REITs, and IPOs. Investors can diversify their portfolios based on risk tolerance and investment goals. Equity instruments are suitable for long-term growth, while derivatives cater to hedging and speculation. ETFs and index funds provide low-cost exposure to broad market segments. New-age investment vehicles like Sovereign Gold Bonds and Infrastructure Investment Trusts (InvITs) are also gaining popularity. This diversity attracts different investor classes—retail, institutional, foreign—and contributes to the depth and maturity of Indian capital markets.

Commodities Market:

Commodity Market is a financial marketplace where raw materials or primary products such as gold, silver, crude oil, agricultural goods, and metals are bought and sold. It enables producers, traders, and investors to hedge against price volatility, speculate for profit, and discover fair prices. The market operates through spot markets (immediate delivery) and derivatives markets (futures and options contracts). In India, the major commodity exchanges include Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX). The market is regulated by SEBI, ensuring transparency, fair practices, and investor protection in commodity trading.

Characteristics of Commodities Market:

  • Physical and Derivative Trading

The commodities market offers both physical (spot) and derivative (futures and options) trading. Physical trading involves immediate delivery and payment for the commodity, while derivative trading allows participants to speculate or hedge price risks through contracts settled at a future date. Physical markets cater to producers, wholesalers, and industrial users, while derivatives attract speculators and investors. This dual structure makes the commodities market versatile, supporting both real economic needs and financial risk management strategies.

  • Standardization

Commodities traded on organized exchanges like MCX (Multi Commodity Exchange) and NCDEX are standardized. This means that the quality, quantity, and delivery terms of the contracts are fixed and predefined. Standardization ensures uniformity, transparency, and fairness in trading. It also minimizes disputes and simplifies the settlement process. For instance, gold contracts are specified by purity and weight. This standardization makes it easier for market participants to compare contracts, understand pricing, and execute trades confidently.

  • Price Volatility

Commodity prices are highly volatile and influenced by global supply-demand factors, weather conditions, geopolitical tensions, currency fluctuations, and government policies. For example, crude oil prices may spike due to a conflict in the Middle East, while agricultural prices can vary with monsoon conditions. This volatility presents both opportunities and risks. It attracts traders aiming to profit from price movements but also increases uncertainty for producers and consumers, who use derivatives to hedge against adverse price fluctuations.

  • Global Integration

The commodities market is globally integrated, with prices influenced by international benchmarks such as Brent Crude for oil or COMEX for gold. Events in one part of the world can quickly impact prices in another. Indian markets, too, are affected by global demand-supply trends and international political or economic events. Global integration improves liquidity and ensures competitive pricing but also exposes domestic markets to global shocks and volatility, making it essential for participants to stay informed.

  • Hedging Function

One of the key purposes of the commodities market is risk management through hedging. Producers, exporters, importers, and consumers use futures and options contracts to lock in prices and protect themselves from adverse price movements. For example, a farmer may hedge against falling wheat prices, while a jewelry manufacturer may hedge against rising gold prices. This function adds stability to business operations and promotes efficient planning, especially in sectors heavily dependent on raw material costs.

  • Speculation and Arbitrage

The commodities market attracts a large number of speculators who seek to profit from price movements without any intention of physical delivery. Speculation adds liquidity and depth to the market but also increases volatility. Arbitrage opportunities arise when price differences exist between markets or contract maturities, allowing traders to profit by buying low and selling high. These activities contribute to price discovery and market efficiency, though excessive speculation may lead to abnormal price swings.

  • Regulation and Surveillance

The commodities market in India is regulated by SEBI (Securities and Exchange Board of India). It ensures fair trading practices, investor protection, and financial stability. SEBI supervises commodity exchanges, mandates reporting norms, and monitors price movements to detect manipulation or cartelization. Regular audits, trading limits, and margin requirements are part of the regulatory framework. Effective regulation enhances market integrity, boosts investor confidence, and ensures a level playing field for all market participants.

  • Wide Range of Commodities

The commodities market covers a diverse range of products grouped into agricultural commodities (wheat, cotton), metals (gold, silver, copper), and energy products (crude oil, natural gas). This variety allows for portfolio diversification and provides opportunities for different industries and investors. Each commodity has its own pricing dynamics, seasonal trends, and risk factors. The wide product base attracts participants with different risk profiles and goals, contributing to the overall vibrancy and utility of the commodities market.

Key differences between Stock Market and Commodities Market

Aspect

Stock Market Commodities Market
Asset Type Securities Physical Goods
Product Examples Shares, ETFs Gold, Oil, Wheat
Trading Focus Ownership Price Movement
Delivery No Delivery Physical/Settlement
Regulation SEBI SEBI
Volatility Moderate High
Market Players Investors Hedgers, Traders
Contract Type Equity, Derivatives Futures, Options
Price Influencers Financials, News Supply, Demand
Time Horizon Long-Term Short-Term
Standardization Company-Specific Uniform Contracts
Global Influence Limited

High

Share Issue Mechanism

The share issue mechanism refers to the process by which a company raises capital by issuing shares to investors. It is an important method for companies to fund expansion, operations, or other financial needs. The shares can be issued to the public, private investors, or existing shareholders. Regulatory compliance, pricing, and market conditions play key roles in this mechanism. In India, the process is governed by the Companies Act, SEBI regulations, and listing agreements of stock exchanges.

Types of Share Issues:

There are several types of share issues: public issue, rights issue, bonus issue, and private placement. A public issue involves offering shares to the general public through a prospectus. Rights issues offer existing shareholders the right to purchase additional shares. Bonus issues involve giving free shares to existing shareholders from reserves. Private placement involves selling shares to a select group of investors, often institutions. Each method is chosen based on the company’s objectives and market conditions.

  • Initial Public Offering (IPO)

An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time. This is done to raise funds, increase visibility, and enable listing on stock exchanges like NSE or BSE. The company appoints merchant bankers, prepares a Draft Red Herring Prospectus (DRHP), and gets approval from SEBI. Once approved, the issue is opened for subscription. Pricing can be fixed or through a book-building process, depending on market strategies.

  • Rights Issue Mechanism

Rights Issue allows existing shareholders to buy additional shares at a discounted price in proportion to their existing holdings. This is a way to raise capital without diluting control. The company sends offer letters to eligible shareholders with a set deadline. Shareholders can accept, reject, or renounce the rights. This mechanism is regulated by SEBI and does not require shareholder approval through a general meeting. It is faster and more cost-effective than a public issue.

  • Bonus Issue of Shares

In a Bonus Issue, a company issues free shares to existing shareholders by capitalizing its free reserves or securities premium. It rewards shareholders without taking in new funds. Bonus issues increase the number of outstanding shares but do not affect the company’s net worth. SEBI guidelines ensure the bonus issue is made from legitimate sources. The process involves board approval and intimation to stock exchanges. This mechanism enhances investor confidence and signals company strength.

  • Private Placement and Preferential Allotment

Private Placement is the issue of shares to a select group of investors, such as institutional or high-net-worth individuals. Preferential Allotment is a type of private placement where shares are issued to a specific group under SEBI regulations. This method is faster and more flexible but must follow strict disclosure and pricing norms. It is commonly used for strategic partnerships or raising quick capital without undergoing public scrutiny or lengthy approval processes involved in public issues.

Book Building Process

Book Building Process is a price discovery mechanism used during IPOs or follow-on public offers. Investors bid for shares within a price band set by the company. Based on demand, the final price (cut-off price) is determined. There are two types: 75% Book Building and 100% Book Building. This process allows market-driven pricing and helps avoid under or overpricing. SEBI mandates transparency and timely disclosure during the book-building process to protect investor interest.

Role of Intermediaries:

Various intermediaries are involved in the share issue mechanism. These include merchant bankers, registrars, underwriters, legal advisors, and auditors. Merchant bankers manage the entire issue process, draft offer documents, and coordinate with SEBI. Registrars handle applications and allotments. Underwriters assure the company that the issue will be subscribed. These intermediaries ensure compliance, smooth processing, and transparency in the issue. Their role is crucial in maintaining investor trust and ensuring the success of the share issue.

Regulatory Framework in India:

The share issue mechanism in India is regulated by multiple authorities. The Securities and Exchange Board of India (SEBI) lays down guidelines for disclosures, pricing, and eligibility. The Companies Act, 2013 governs corporate approvals and procedures. The Stock Exchanges (BSE/NSE) monitor compliance with listing norms. Additionally, the Depositories Act ensures dematerialization of shares. Companies must comply with these regulations to ensure investor protection and transparency. Violations can lead to penalties or cancellation of issue approvals.

Post-Issue Activities and Listing:

After the share issue, the company undertakes post-issue activities like allotment of shares, refunds (if applicable), credit to demat accounts, and listing on the stock exchange. Listing enables the shares to be traded in the secondary market. The company must submit listing documents and meet all criteria. Post-listing, it must comply with disclosure norms and governance standards. These steps ensure liquidity for investors and credibility for the company in the capital markets.

Financial Institutions, Objectives, Features, Types

Financial Institutions are organizations that facilitate financial transactions, including the management, investment, and transfer of funds. They act as intermediaries between savers and borrowers, ensuring efficient capital allocation. Examples include commercial banks, non-banking financial companies (NBFCs), insurance firms, mutual funds, and pension funds. These institutions provide services such as accepting deposits, granting loans, managing investments, and offering insurance. They play a crucial role in economic development by ensuring financial stability, credit availability, and risk management. In India, financial institutions are regulated by bodies like the Reserve Bank of India (RBI), SEBI, IRDAI, and PFRDA to ensure transparency and stability.

Objectives of Financial Institution:

  • Mobilization of Savings

One of the core objectives of financial institutions is to encourage and mobilize public savings. They provide secure and attractive avenues for individuals and businesses to deposit surplus funds. By offering interest, safety, and liquidity, financial institutions build trust and channel savings into productive investments. This process strengthens the overall financial system, enhances capital formation, and supports economic growth. They play a crucial role in converting idle savings into useful capital, ensuring that resources are efficiently allocated across various sectors of the economy.

  • Facilitating Capital Formation

Financial institutions serve as intermediaries between savers and investors, helping in the creation of capital. By collecting savings and making them available for business ventures, they facilitate the growth of industries and infrastructure. This capital formation boosts production, employment, and income levels in the economy. They help in the smooth functioning of primary and secondary markets by issuing and trading securities. Thus, financial institutions ensure that long-term funds are available for both private and public sector investment projects, encouraging development and innovation.

  • Providing Credit and Loans

Another vital objective is to provide loans and credit facilities to individuals, businesses, and governments. Financial institutions offer both short-term and long-term credit based on the specific needs of borrowers. These loans support activities like entrepreneurship, industrial expansion, agriculture, trade, and housing. Institutions assess creditworthiness and ensure appropriate interest rates and repayment terms. By ensuring timely availability of funds, they reduce financial bottlenecks and enable sustained growth across sectors. Proper credit allocation also promotes financial inclusion and empowers underprivileged sections of society.

  • Ensuring Financial Stability

Maintaining financial stability is a critical goal. Financial institutions reduce risks by managing interest rate fluctuations, inflation, and liquidity challenges. They are regulated by central authorities like central banks to follow prudent financial practices. By promoting transparency, risk assessment, and diversification, institutions prevent the collapse of the financial system. They provide confidence to investors and depositors by upholding standards in lending, investments, and reserves. Stable financial institutions contribute to an efficient payment system, minimize fraud, and create a reliable financial environment.

  • Promoting Economic Development

Financial institutions drive economic growth by supporting productive sectors. They finance agriculture, small businesses, large industries, and infrastructure projects, which results in employment generation and income distribution. By supporting innovation and technology, they help enhance productivity and competitiveness. Institutions also fund government development plans and welfare schemes. Through inclusive financial services, they help reduce poverty and regional disparities. Ultimately, their objective is to contribute to a sustainable and balanced development that benefits all sections of society, including rural and underserved communities.

  • Encouraging Investment

Financial institutions aim to promote domestic and foreign investment. By offering diversified financial instruments like mutual funds, bonds, insurance, and pension plans, they attract investors with different risk appetites. They create a favorable investment climate by ensuring transparency, credibility, and investor protection. Institutions also help investors with advisory services, research reports, and portfolio management. By simplifying investment processes and offering digital platforms, they empower individuals to grow their wealth. Investments channeled through these institutions support infrastructure and entrepreneurship, fueling economic progress.

  • Regulating Monetary Policy Implementation

Financial institutions help implement monetary policy set by the central bank. They regulate the flow of money through tools such as interest rates, reserve requirements, and credit supply. By transmitting policy changes to the economy, they influence inflation, liquidity, and exchange rates. For example, when interest rates are adjusted, financial institutions modify their lending and deposit rates accordingly. This objective ensures economic stability and aligns financial operations with national economic goals. Their role in the monetary system enhances policy effectiveness and macroeconomic management.

  • Providing Financial Services and Innovation

Financial institutions provide a wide range of services, including savings accounts, insurance, foreign exchange, digital payments, and investment options. These services help in managing personal and business finances efficiently. They continually innovate by adopting technology, such as mobile banking, fintech, and online platforms, making services accessible and convenient. Institutions also support financial literacy by educating customers about smart financial practices. This objective enhances customer experience, fosters trust, and keeps the financial ecosystem competitive and dynamic in a rapidly evolving global market.

Features of Financial Institution:

  • Financial Intermediation

Financial institutions act as intermediaries between savers and borrowers by collecting funds from depositors and lending them to individuals, businesses, and governments. This intermediation helps in the efficient allocation of resources, ensuring that capital flows into productive sectors. By channeling savings into investments, they contribute to capital formation and economic development. Their role in bridging the gap between surplus and deficit units makes them an integral part of the financial system, enabling smooth economic transactions and promoting growth.

  • Regulated Operations

Financial institutions operate under strict regulations imposed by governing bodies to ensure transparency, stability, and security. In India, institutions like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA) oversee various financial entities. These regulations prevent fraudulent practices, ensure customer protection, and maintain the integrity of the financial system. By complying with regulatory guidelines, financial institutions help in fostering trust and confidence among investors, businesses, and the general public.

  • Variety of Financial Services

Financial institutions provide a wide range of financial services, including banking, investment management, insurance, credit facilities, and asset management. Commercial banks offer services like savings accounts, loans, and remittances, while investment firms manage wealth and securities trading. Insurance companies provide risk coverage, and NBFCs cater to specialized financial needs. The availability of diverse financial services helps individuals and businesses manage their financial needs efficiently, contributing to economic progress. This diversification also enhances the accessibility and flexibility of financial solutions for different market segments.

  • Liquidity Provision

One of the key functions of financial institutions is to provide liquidity by enabling the easy conversion of assets into cash. Banks ensure liquidity through demand deposits, while stock exchanges provide a platform for buying and selling securities. The presence of liquid financial instruments like treasury bills and commercial papers allows businesses and individuals to meet their short-term financial obligations. By maintaining liquidity, financial institutions support economic stability, prevent financial crises, and facilitate smooth business operations and investment activities in the economy.

  • Risk Management and Insurance

Financial institutions help in managing financial risks through various instruments and services. Insurance companies offer policies to protect against life, health, property, and business risks. Banks and financial firms provide derivatives like futures and options to hedge against market fluctuations. By offering risk management solutions, financial institutions protect individuals and businesses from unforeseen financial losses. This function enhances financial security, promotes stability, and encourages investment by reducing uncertainty and ensuring protection against economic disruptions.

  • Mobilization of Savings

Financial institutions encourage savings by offering safe and secure avenues like fixed deposits, recurring deposits, and mutual funds. These savings are then pooled and directed toward productive investments, contributing to capital formation and economic development. By offering attractive interest rates and investment options, financial institutions promote a savings culture among individuals and businesses. Efficient mobilization of savings ensures that idle money is put to use, leading to economic growth and infrastructure development in the country.

  • Credit Creation and Allocation

Financial institutions create and allocate credit by providing loans and advances to individuals, businesses, and governments. Commercial banks, NBFCs, and microfinance institutions play a crucial role in financing economic activities. By assessing creditworthiness and risk factors, these institutions ensure that funds are directed toward viable projects. The availability of credit fosters entrepreneurship, industrialization, and infrastructure development. Proper credit allocation also supports consumer spending, enhances business expansion, and stimulates economic growth by ensuring that capital is efficiently utilized.

  • Support for Economic Growth and Development

Financial institutions contribute significantly to economic development by financing industries, infrastructure projects, and technological advancements. They provide capital to businesses, support innovation, and facilitate trade. Through financial inclusion initiatives, they ensure that underserved populations have access to banking and credit services, reducing income inequality. By playing a pivotal role in economic planning, investment, and development, financial institutions help in achieving sustainable growth and improving the overall standard of living in society.

Types of Financial Institution:

  • Commercial Banks

Commercial banks accept deposits and provide loans to individuals, businesses, and governments. They offer financial services such as savings accounts, fixed deposits, credit cards, and fund transfers. Regulated by the Reserve Bank of India (RBI), they ensure liquidity in the economy. Examples include State Bank of India (SBI), ICICI Bank, and HDFC Bank. By facilitating credit creation and safe money transactions, commercial banks support economic growth and financial stability in the country.

  • Non-Banking Financial Companies (NBFCs)

NBFCs provide financial services similar to banks but cannot accept demand deposits. They offer loans, asset financing, hire purchase, and investment services. Regulated by RBI, NBFCs help in financial inclusion by catering to businesses and individuals who may not have access to traditional banking. Examples include Bajaj Finance, LIC Housing Finance, and Mahindra Finance. These institutions play a significant role in credit disbursement, especially in rural and semi-urban areas, supporting economic activities.

  • Cooperative Banks

Cooperative banks are financial institutions owned and operated by their members, primarily catering to small businesses and rural populations. They provide loans at lower interest rates and promote financial inclusion. Governed by RBI and state cooperative bodies, they operate at urban and rural levels. Examples include Urban Cooperative Banks and Rural Cooperative Banks. By supporting agriculture, small-scale industries, and self-help groups, cooperative banks help in regional development and empower economically weaker sections of society.

  • Development Banks

Development banks provide long-term financing for industrial and infrastructure projects. They support large-scale development activities such as roads, power plants, and manufacturing units. In India, Industrial Finance Corporation of India (IFCI), Small Industries Development Bank of India (SIDBI), and National Bank for Agriculture and Rural Development (NABARD) are key development banks. These banks play a vital role in economic planning and ensure the availability of capital for sectors that require large-scale investment and long-term funding.

  • Investment Banks

Investment banks assist businesses in raising capital through equity and debt markets. They provide services like mergers and acquisitions, underwriting, and asset management. Unlike commercial banks, they do not accept public deposits. Examples include Goldman Sachs, Morgan Stanley, and JM Financial. Investment banks help companies access financial markets, enabling them to expand operations and improve financial performance. They also support government and corporate bond issuances, ensuring efficient capital allocation in the economy.

  • Insurance Companies

Insurance companies provide financial protection against risks such as life, health, property, and business uncertainties. They collect premiums and offer financial security in case of unexpected events. Regulated by Insurance Regulatory and Development Authority of India (IRDAI), major players include Life Insurance Corporation (LIC), ICICI Prudential, and HDFC Life. By mitigating financial risks, insurance companies help individuals and businesses safeguard their assets, ensuring economic stability and security against unforeseen circumstances.

  • Pension Funds

Pension funds manage retirement savings and provide financial security to individuals post-retirement. They invest funds in various assets, ensuring stable returns. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), examples include Employees’ Provident Fund Organisation (EPFO) and National Pension System (NPS). These funds play a critical role in providing financial independence to retired individuals and supporting long-term capital markets by channeling savings into productive investments.

  • Mutual Funds

Mutual funds pool money from investors and invest in diversified assets like stocks, bonds, and money market instruments. They are managed by professional fund managers and regulated by Securities and Exchange Board of India (SEBI). Examples include SBI Mutual Fund, HDFC Mutual Fund, and ICICI Prudential Mutual Fund. Mutual funds offer investors the benefit of diversification, professional management, and liquidity, making them a popular investment choice for wealth creation and financial planning.

Initial Public Offering (IPO), Terms, Process, Advantages, Disadvantages

An Initial Public Offering (IPO) is the process by which a private company becomes publicly traded by offering its shares to investors for the first time on a stock exchange. This allows the company to raise capital for expansion, debt repayment, or other financial needs. The IPO process involves regulatory approvals, pricing, and underwriting by investment banks. Once listed, the company’s shares are freely traded in the stock market. IPOs provide investors with an opportunity to own equity in a growing company while enabling businesses to access public funding and enhance their market visibility and credibility.

General Terms involved in an initial public offering (IPO):

  1. Issuer: The company that offers its shares to the public through an IPO to raise capital. It transitions from private to public ownership.

  2. Underwriter: Investment banks or financial institutions that manage and facilitate the IPO process, including pricing, marketing, and share allocation.

  3. Prospectus: A legal document providing detailed information about the company’s financials, business model, risks, and IPO details, helping investors make informed decisions.

  4. Offer Price: The price at which shares are initially issued to investors. It is determined through book-building or fixed price methods.

  5. Book Building: A price discovery process where investors place bids within a price range, and the final issue price is determined based on demand.

  6. Fixed Price Issue: The company sets a pre-determined price for its shares, and investors subscribe at that price. Demand is known only after the issue closes.

  7. Lot Size: The minimum number of shares an investor can apply for in an IPO, defined by the issuing company.

  8. Subscription: The demand for IPO shares. If demand exceeds supply, the IPO is oversubscribed; otherwise, it is undersubscribed.

  9. Allotment: The process of distributing shares to investors based on their IPO applications. If oversubscribed, shares are allotted via a lottery system.

  10. Listing: The process where IPO shares get listed on a stock exchange (NSE, BSE), enabling public trading of the company’s stock.

Process involved in an initial public offering (IPO)

  1. Underwriting

IPO is done through the process called underwriting. Underwriting is the process of raising money through debt or equity.

The first step towards doing an IPO is to appoint an investment banker. Although theoretically a company can sell its shares on its own, on realistic terms, the investment bank is the prime requisite. The underwriters are the middlemen between the company and the public. There is a deal negotiated between the two.

E.g. of underwriters: Goldman Sachs, Credit Suisse and Morgan Stanley to mention a few.

The different factors that are considered with the investment bankers include:

  • The amount of money the company will raise
  • The type of securities to be issued
  • Other negotiating details in the underwriting agreement

The deal could be a firm commitment where the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public, or best efforts agreement, where the underwriter sells securities for the company but doesn’t guarantee the amount raised. Also to off shoulder the risk in the offering, there is a syndicate of underwriters that is formed led by one and the others in the syndicate sell a part of the issue.

  1. Filing with the Sebi

Once the deal is agreed upon, the investment bank puts together a registration statement to be filed with the SEBI. This document contains information about the offering as well as company information such as financial statements, management background, any legal problems, where the money is to be used etc. The SEBI then requires cooling off period, in which they investigate and make sure all material information has been disclosed. Once the SEBI approves the offering, a date (the effective date) is set when the stock will be offered to the public.

  1. Red Herring

During the cooling off period, the underwriter puts together there herring. This is an initial prospectus that contains all the information about the company except for the offer price and the effective date. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. With the red herring, efforts are made where the big institutional investors are targeted (also called the dog and pony show).

As the effective date approaches, the underwriter and the company decide on the price of the issue. This depends on the company, the success of the various promotional activities and most importantly the current market conditions. The crux is to get the maximum in the interest of both parties.

Finally, the securities are sold on the stock market and the money is collected from investors.

Advantages of coming up with an IPO:

  • Access to Capital for Growth

An Initial Public Offering (IPO) enables a company to raise substantial capital from public investors. This funding can be used for business expansion, research and development, acquisitions, debt repayment, and infrastructure growth. Unlike bank loans or private equity, IPO funds do not require repayment, reducing financial burdens. With more capital, companies can invest in innovation, expand into new markets, and increase operational capacity, ensuring long-term sustainability and competitiveness in their industry.

  • Increased Public Awareness and Market Credibility

Going public enhances a company’s brand visibility and credibility in the market. Being listed on a stock exchange like NSE or BSE attracts media attention, analysts, and institutional investors, boosting the company’s reputation. This credibility helps in gaining customer trust, attracting new business opportunities, and securing strategic partnerships. A public company is perceived as more transparent and financially stable, which strengthens investor confidence and improves long-term business prospects.

  • Liquidity and Exit Opportunity for Early Investors

An IPO provides an exit strategy for early investors, founders, and venture capitalists who seek to realize returns on their investments. Unlike private funding, where selling shares can be complex, a public listing allows shareholders to sell their stakes in the open market. This liquidity increases investor interest in the company, making it easier to attract future investments. Employees with stock options (ESOPs) also benefit by monetizing their shares post-listing.

  • Ability to Use Stock as Currency

Publicly listed companies can use their shares as non-cash currency for mergers, acquisitions, and employee compensation. This means that instead of paying cash for acquisitions, they can issue new shares, preserving liquidity while expanding their business. Additionally, offering stock-based incentives to employees improves retention and motivation, aligning employee interests with company performance. This flexibility makes IPOs an attractive option for companies looking to grow strategically without heavy financial burdens.

  • Improved Corporate Governance and Transparency

Going public requires companies to adhere to stricter regulations and disclosure norms, improving corporate governance. Listed companies must publish financial reports, undergo audits, and follow SEBI guidelines, ensuring transparency and accountability. This structured governance framework enhances investor confidence, reduces operational risks, and leads to better decision-making. Improved governance also helps in securing further investments from institutional investors, ensuring long-term sustainability and trust in the financial markets.

Disadvantages of Coming up with an IPO:

  • High Costs and Expenses

Launching an IPO involves significant costs, including underwriting fees, legal expenses, regulatory compliance costs, and marketing expenses. Companies must hire investment banks, auditors, and legal advisors, making the IPO process expensive. Additionally, after listing, ongoing costs for financial reporting, compliance, and shareholder communication increase the financial burden. These costs may outweigh the benefits, especially for smaller firms with limited capital, making IPOs a less viable option compared to other funding sources.

  • Loss of Control and Ownership Dilution

When a company goes public, founders and existing shareholders lose a portion of their ownership as shares are distributed among public investors. This dilution can lead to a loss of control, especially if institutional investors or activist shareholders acquire a significant stake. Public companies must also consider shareholder interests in decision-making, which can limit flexibility and independence in business operations. Major decisions may require board approval, reducing management’s autonomy in strategic planning.

  • Regulatory and Compliance Burden

Public companies must adhere to strict regulations imposed by SEBI (Securities and Exchange Board of India) and stock exchanges. They are required to disclose financial statements, conduct regular audits, and follow corporate governance norms. Any failure to comply can result in penalties, legal actions, or delisting. The increased scrutiny demands transparency in operations, making it difficult for companies to keep certain strategic or financial information confidential, which could impact their competitive edge.

  • Market Volatility and Stock Price Fluctuations

Once listed, a company’s stock price is subject to market conditions, investor sentiment, and economic factors. External events such as economic downturns, political instability, or industry trends can lead to extreme fluctuations in share prices, affecting the company’s valuation. A declining stock price may create negative investor perception, reducing the company’s ability to raise additional funds. Management may also face pressure to meet short-term earnings expectations rather than focusing on long-term growth strategies.

  • Increased Public and Investor Pressure

A public company is accountable to shareholders, analysts, and regulators, which increases pressure on management to deliver consistent financial performance. Investors expect regular profits, dividends, and stock price growth, forcing companies to prioritize short-term performance over long-term strategies. Additionally, the risk of hostile takeovers increases as external investors accumulate shares. Management must spend significant time handling shareholder concerns, investor relations, and public disclosures, which can divert attention from core business operations.

  • Risk of Underperformance and Delisting

Not all IPOs succeed. If a company fails to meet investor expectations or generates lower-than-expected profits, its stock price may decline. Poor market conditions, weak financials, or mismanagement can lead to low demand for shares, resulting in poor post-IPO performance. In extreme cases, if a company fails to maintain compliance standards or sustains financial losses, it may face delisting from stock exchanges, leading to a loss of investor confidence and reputation damage.

Definition, Objectives and Functions, Components of the Financial System

Financial System is a network of institutions, markets, instruments, and regulations that facilitate the flow of funds within an economy. It enables savings, investments, credit allocation, and risk management. The system comprises financial institutions (banks, NBFCs, insurance companies), financial markets (money market, capital market, forex market), financial instruments (stocks, bonds, derivatives), and regulatory bodies (RBI, SEBI, IRDAI). A well-functioning financial system promotes economic stability and growth by ensuring efficient capital allocation and liquidity management. In India, the financial system plays a crucial role in mobilizing savings and channeling them into productive sectors, fostering economic development.

Objectives of the Financial System:

  • Mobilization of Savings

The financial system encourages individuals and businesses to save money by offering various financial instruments such as bank deposits, mutual funds, and insurance. These savings are pooled and directed towards productive investments, fostering capital formation. Efficient mobilization ensures that idle money is put to use, enhancing economic growth. It also provides security to depositors and ensures financial stability in the economy by channeling funds into sectors that require capital for expansion and development.

  • Efficient Allocation of Resources

A well-structured financial system ensures that funds are allocated to their most productive uses. It helps businesses and industries acquire the necessary capital for growth and innovation. Through financial markets, capital is transferred from surplus sectors to deficit sectors, promoting overall economic efficiency. Banks, stock exchanges, and financial institutions play a key role in evaluating investment opportunities and directing funds to areas with high returns, reducing the risk of misallocation of resources and ensuring optimal utilization of available financial assets.

  • Facilitating Investment and Economic Growth

The financial system provides a framework for investment by connecting investors with businesses in need of funds. It offers various investment options such as bonds, stocks, and mutual funds, enabling capital accumulation. This process fuels entrepreneurship, industrialization, and infrastructure development, which in turn drives economic growth. By reducing transaction costs and risks, the financial system enhances investor confidence and ensures long-term sustainability, contributing to national development through the continuous cycle of investment and wealth generation.

  • Maintaining Financial Stability

A primary objective of the financial system is to ensure economic stability by regulating financial activities and preventing market disruptions. Regulatory bodies like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) oversee banking and capital markets to minimize risks such as inflation, credit crises, and fraud. Stability is maintained through monetary policies, interest rate adjustments, and liquidity management. A stable financial system builds public confidence, prevents financial crises, and ensures smooth economic functioning even during periods of uncertainty.

  • Providing Liquidity and Credit Facilities

The financial system ensures liquidity by allowing individuals and businesses to convert their financial assets into cash quickly. It provides credit facilities through banks and financial institutions, enabling businesses to operate smoothly and expand their activities. Various credit instruments, such as loans, overdrafts, and credit lines, help meet short-term and long-term financial needs. By ensuring the availability of credit, the financial system supports consumption, production, and investment activities, promoting overall economic stability and growth.

  • Encouraging Financial Inclusion

The financial system aims to bring all sections of society under its umbrella by promoting financial inclusion. It ensures access to banking, insurance, and credit facilities for rural and economically weaker sections. Government initiatives like Jan Dhan Yojana and microfinance institutions play a vital role in expanding financial services. Financial inclusion enhances economic equality, reduces poverty, and empowers individuals by providing them with the means to save, invest, and secure their financial future, thereby improving overall economic well-being.

  • Regulating Financial Markets and Institutions

A well-functioning financial system establishes regulations to ensure transparency, efficiency, and fairness in financial transactions. Regulatory authorities like RBI, SEBI, and IRDAI monitor financial institutions to prevent fraudulent activities and protect investors’ interests. These regulations promote corporate governance, enhance investor confidence, and maintain financial discipline. By ensuring compliance with laws and guidelines, the financial system prevents market failures and irregularities, fostering trust and stability in the economic framework.

  • Promoting Innovation and Technological Advancement

The financial system encourages innovation by supporting startups and research-oriented businesses through venture capital, crowdfunding, and fintech solutions. It plays a key role in the adoption of digital banking, online payments, and blockchain technology, enhancing the efficiency of financial transactions. Technological advancements improve financial accessibility, reduce transaction costs, and enable global financial integration. By fostering innovation, the financial system ensures continuous economic progress and adapts to evolving market needs in a dynamic business environment.

Functions of the Financial System:

  • Mobilization of Savings

The financial system mobilizes savings from households, businesses, and governments, channeling them into productive investments. This function enables the allocation of resources from savers to investors, facilitating economic growth. Financial intermediaries, such as banks and mutual funds, play a crucial role in mobilizing savings and providing a platform for investment.

  • Allocation of Resources

The financial system allocates resources efficiently by directing funds to the most productive sectors and projects. This function ensures that resources are utilized optimally, promoting economic growth and development. The financial system achieves this through various mechanisms, including interest rates, credit allocation, and risk assessment.

  • Providing Liquidity

The financial system provides liquidity to facilitate the smooth functioning of economic transactions. Liquidity enables individuals and businesses to meet their short-term financial obligations, reducing the risk of default and promoting economic stability. Financial markets, such as stock and bond markets, provide liquidity by allowing investors to buy and sell securities easily.

  • Risk Management

The financial system manages risk by providing various instruments and mechanisms to mitigate uncertainty. This function enables individuals and businesses to manage their exposure to risk, promoting economic stability and growth. Financial derivatives, such as options and futures, are examples of risk management instruments.

  • Facilitating Transactions

The financial system facilitates transactions by providing a platform for the exchange of goods and services. This function enables individuals and businesses to conduct economic transactions efficiently, promoting economic growth and development. Payment systems, such as credit cards and electronic funds transfer, facilitate transactions by providing a convenient and secure means of payment.

  • Providing Information

The financial system provides information to facilitate informed decision-making by investors and other stakeholders. This function enables individuals and businesses to make informed decisions about investments, credit, and other financial matters. Financial statements, such as balance sheets and income statements, provide information about a company’s financial performance and position.

  • Monitoring and Regulation

The financial system monitors and regulates financial institutions and markets to promote stability and prevent abuse. This function ensures that financial institutions operate in a safe and sound manner, protecting the interests of depositors and investors. Regulatory bodies, such as central banks and securities commissions, monitor and regulate financial institutions and markets.

  • Promoting Economic Growth

The financial system promotes economic growth by providing the necessary financial infrastructure and services to support economic development. This function enables individuals and businesses to access capital, manage risk, and conduct transactions efficiently, promoting economic growth and development. A well-functioning financial system is essential for promoting economic growth and reducing poverty.

Components of the Financial System:

  • Financial Institutions

Financial institutions act as intermediaries between savers and borrowers, ensuring efficient capital allocation. They include banks, non-banking financial companies (NBFCs), insurance companies, mutual funds, and pension funds. These institutions provide various services like accepting deposits, granting loans, managing investments, and offering insurance. The Reserve Bank of India (RBI) regulates financial institutions to maintain stability and transparency. By facilitating credit availability and financial transactions, they contribute to economic development and promote financial inclusion, ensuring that funds are directed toward productive and growth-oriented sectors.

  • Financial Markets

Financial markets facilitate the buying and selling of financial assets like stocks, bonds, derivatives, and foreign exchange. They are broadly classified into money markets (short-term financial instruments) and capital markets (long-term financial instruments). The stock market, where companies issue shares to raise funds, is a crucial part of the capital market. The bond market allows governments and corporations to borrow money through debt instruments. These markets provide liquidity, determine asset prices, and ensure efficient capital allocation, enabling businesses and governments to meet their funding needs.

  • Financial Instruments

Financial instruments are contracts that represent a financial claim or obligation. They include equity (stocks), debt (bonds, loans), derivatives (futures, options), and insurance policies. These instruments help individuals and businesses raise funds, invest in growth opportunities, and manage risks. Equity instruments allow investors to become partial owners of a company, while debt instruments provide fixed-income returns. Derivatives help in hedging against price fluctuations. Financial instruments enable efficient capital mobilization, facilitate investment diversification, and play a crucial role in stabilizing the financial system.

  • Financial Services

Financial services include a range of economic activities provided by banks, insurance firms, investment companies, and asset management firms. These services include banking, wealth management, insurance, mutual funds, and financial advisory. Financial services help individuals and businesses manage their financial resources efficiently by offering customized investment solutions, risk management strategies, and credit facilities. They enhance the overall functioning of the financial system by ensuring financial stability, providing innovative financial products, and supporting economic growth through capital formation and investment management.

  • Regulatory Bodies

Regulatory bodies oversee and control financial institutions, markets, and transactions to ensure stability, transparency, and investor protection. In India, key regulatory bodies include the Reserve Bank of India (RBI) for banking, the Securities and Exchange Board of India (SEBI) for capital markets, the Insurance Regulatory and Development Authority of India (IRDAI) for insurance, and the Pension Fund Regulatory and Development Authority (PFRDA) for pension funds. These institutions enforce regulations, monitor financial activities, and prevent fraudulent practices, ensuring a well-functioning financial system that promotes sustainable economic development and public confidence.

Financial System Reforms in India

India’s financial sector has undergone significant reforms since liberalization in 1991. These reforms aimed at enhancing efficiency, stability, and inclusivity. Key measures include banking reforms, capital market development, and regulatory strengthening. The reforms have transformed India into a more competitive and resilient financial system, attracting global investments and fostering economic growth.

  • Banking Sector Reforms

Narasimham Committee (1991, 1998) laid the foundation for banking reforms. Key changes included reducing statutory liquidity ratios (SLR), introducing prudential norms, and encouraging private banks. These steps improved efficiency, reduced non-performing assets (NPAs), and enhanced credit flow. Recent reforms like insolvency laws (IBC) and bank mergers further strengthened the sector.

  • Capital Market Reforms

SEBI’s establishment (1992) modernized India’s capital markets. Reforms like dematerialization (Demat), electronic trading, and FII participation boosted transparency. The introduction of derivatives, algorithmic trading, and REITs diversified investment options. These measures increased market depth, liquidity, and investor confidence, making India an attractive destination for global capital.

  • Insurance Sector Liberalization

IRDA Act (1999) opened the insurance sector to private and foreign players. Increased FDI limits (74% in 2021) spurred competition and innovation. Products like ULIPs and micro-insurance expanded coverage. These reforms improved penetration, customer choice, and financial security, supporting long-term savings and risk management.

  • Pension Reforms (NPS)

New Pension Scheme (NPS, 2004) shifted from defined benefit to defined contribution, ensuring sustainability. It extended pension coverage to the unorganized sector, offering market-linked returns. The Atal Pension Yojana (2015) further promoted inclusive retirement security. These reforms reduced fiscal burdens while ensuring old-age income stability.

  • Digital Financial Inclusion

Initiatives like Jan Dhan Yojana (2014), UPI, and Aadhaar-linked banking boosted financial inclusion. Digital payments (RuPay, BHIM) reduced cash dependency. The rise of fintech and neobanks expanded access to credit and insurance, bridging the urban-rural divide and empowering underserved populations.

  • Regulatory Strengthening

Reforms like the FRBM Act (2003) and MPC framework (2016) enhanced fiscal and monetary discipline. Unified regulatory bodies (FSDC) improved coordination. Stricter NBFC regulations post-IL&FS crisis ensured financial stability. These steps reinforced trust in India’s financial ecosystem.

Reserve Bank of India (RBI), Objectives, Role, Importance, Functions

Central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital to Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid, which was entirely owned by private shareholders in the beginning. The government held shares of nominal value of Rs. 2, 20,000.

Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with headquarters at Mumbai, Kolkata, Chennai and New Delhi.

Local Boards consist of five members each whom the Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

  • To regulate the issue of bank notes
  • To maintain reserves with a view to securing monetary stability.
  • To operate the credit and currency system of the country to its advantage.

The Reserve Bank of India (RBI) has been playing an important role in the economy of the country both in its regulatory and promotional aspects. Since the inception of planning in 1951, the developmental activities are gaining momentum in the country. Accordingly, more and more responsibilities have been entrusted with the RBI both in the regulatory and promotional area. Now-a-days, the RBI has been performing a wide range of regulatory and promotional functions in the country.

Objectives of Reserve Bank of India (RBI)

  • Monetary Stability

One of the primary objectives of the RBI is to maintain monetary stability in the country. This involves controlling inflation, regulating the supply of money, and ensuring price stability. By using tools like the repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR), the RBI manages liquidity in the economy. Stable prices help foster confidence among consumers and businesses, encouraging investment and long-term growth. Monetary stability also safeguards the value of the Indian currency and supports sustainable economic development by preventing extreme inflation or deflation trends.

  • Financial Stability

The RBI plays a crucial role in maintaining financial stability in the Indian economy. This means ensuring that financial institutions, such as banks and non-banking financial companies (NBFCs), operate safely and soundly. By supervising and regulating these entities, the RBI minimizes systemic risks and prevents bank failures that can disrupt the economy. Through stress tests, capital adequacy norms, and regular inspections, the RBI builds resilience in the financial system. Financial stability boosts public confidence, encourages savings, and helps create a robust foundation for economic growth and development across all sectors.

  • Currency Issuance and Management

As the sole issuer of currency in India, the RBI is responsible for the design, production, and distribution of banknotes and coins. This function ensures that the public has access to adequate and secure currency at all times. The RBI works to prevent counterfeiting by introducing security features and periodically redesigning notes. It also ensures that old, damaged, or soiled notes are withdrawn efficiently. Proper currency management helps maintain public trust in the monetary system, facilitates smooth transactions, and supports the efficient functioning of the overall economy.

  • Regulation of Credit

The RBI aims to regulate the volume and direction of credit in the Indian economy to meet developmental and social priorities. By controlling interest rates, setting lending norms, and issuing guidelines on priority sector lending, the RBI ensures that credit flows to productive sectors like agriculture, small businesses, and infrastructure. Effective credit regulation helps prevent speculative activities and financial bubbles. It also supports inclusive growth by channeling funds toward under-served regions and vulnerable populations. By balancing credit supply and demand, the RBI promotes economic stability and sustainable development.

  • Foreign Exchange Management

The RBI is entrusted with managing India’s foreign exchange reserves and maintaining the stability of the rupee in the global market. Under the Foreign Exchange Management Act (FEMA), the RBI monitors and regulates foreign currency transactions, external borrowings, and capital flows. It intervenes in the foreign exchange market when necessary to smooth out volatility and prevent sharp fluctuations in the exchange rate. Stable foreign exchange rates enhance investor confidence, facilitate international trade, and safeguard the country’s balance of payments position, ultimately strengthening India’s economic resilience and competitiveness.

  • Developmental Role

Apart from regulatory functions, the RBI also plays a developmental role by promoting financial inclusion, expanding banking services, and supporting rural development. It initiates policies to encourage the flow of credit to sectors like agriculture, micro and small enterprises, and weaker sections of society. The RBI fosters innovation in payment systems and promotes the use of digital banking channels. Additionally, it works to strengthen financial literacy and awareness among the public. Through its developmental initiatives, the RBI supports broad-based economic growth and contributes to reducing poverty and inequality.

  • Consumer Protection

Protecting the interests of consumers is a key objective of the RBI. It ensures that banks and financial institutions adhere to fair practices, transparency, and responsible lending. The RBI issues guidelines on customer rights, grievance redressal mechanisms, and disclosure standards. It has established systems like the Banking Ombudsman to address complaints efficiently. By safeguarding consumer interests, the RBI builds public trust in the financial system, encourages formal savings, and promotes responsible financial behavior. Consumer protection ultimately strengthens the integrity and inclusiveness of India’s banking and financial sector.

  • Promotion of Modern Payment Systems

RBI promotes the development of modern, secure, and efficient payment and settlement systems in India. This includes introducing innovations like the Unified Payments Interface (UPI), Real-Time Gross Settlement (RTGS), and the National Electronic Funds Transfer (NEFT) system. The RBI’s objective is to enhance the speed, safety, and convenience of money transfers and reduce reliance on cash transactions. By supporting digital payments and fintech innovations, the RBI helps build a cashless economy, improves transparency, reduces transaction costs, and enhances the overall efficiency of India’s financial system.

Roles of the Reserve Bank of India (RBI)

  • Regulating the Volume of Currency

The RBI is performing the regulatory role in issuing and controlling the entire volume of currency in the country through its Issue Department. While regulating the volume of currency the RBI is giving priority on the demand for currency and the stability of the economy equally.

  • Regulating Credit

RBI is also performing the role to control the credit money created by the commercial banks through its qualitative and quantitative methods of credit control and thereby maintains a balance in the money supply of the country.

  • Control over Commercial Banks

Another regulatory role performed by the RBI is to have control over the functioning of the commercial banks. It also enforces certain prudential norms and rational banking principles to be followed by the commercial banks.

  • Determining the Monetary and Credit Policy

RBI has been formulating the monetary and credit policy of the country every year and thereby it controls the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), bank rate, interest rate, credit to priority sectors etc.

  • Mobilizing Savings

RBI is playing a vital promotional role to mobilize savings through its member commercial banks and other financial institutions. RBI is also guiding the commercial banks to extend their banking network in the unbanked rural and semi-urban areas and also to develop banking habits among the people. All these have led to the attainment of greater degree of monetization of the economy and has been able to reduce the activities of indigenous bankers and private money­lenders.

  • Institutional Credit to Agriculture

RBI has been trying to increase the flow of institutional credit to agriculture from the very beginning. Keeping this objective in mind, the RBI set up ARDC in 1963 for meeting the long term credit requirement of rural areas. Later on in July 1982, the RBI set up NABARD and merged ARDC with it to look after its agricultural credit functions.

  • Specialized Financial Institutions

RBI has also been playing an important promotional role for setting specialized financial institutions for meeting the long term credit needs of large and small scale industries and other sectors. Accordingly, the RBI has promoted the development of various financial institutions like, WCI, 1DBI, ICICI, SIDBI, SFCs, Exim Bank etc. which are making a significant contribution to industry and trade of the country.

  • Security to Depositors

In order to remove the major hindrance to the deposit mobilization arising out of frequent bank failures, the RBI took major initiative to set up the Deposit Insurance Corporation of India in 1962. The most important objective of this corporation is to provide security to the depositors against such failures.

  • Advisory Functions

RBI is also providing advisory functions to both the Central and State Governments on both financial matters and also on general economic problems.

  • Policy Support

RBI is also providing active policy support to the government through its investigation research on serious economic problems and issues of the country and thereby helps the Government to formulate its economic policies in a most rational manner. Thus, it is observed that the RBI has been playing a dynamic role in the economic development process of the country through its regulatory and promotional framework.

Functions of the Reserve Bank of India (RBI):

  • Note Issue

Being the Central Bank of the country, the RBI is entrusted with the sole authority to issue currency notes after keeping certain minimum reserve consisting of gold reserve worth Rs. 115 crore and foreign exchange worth Rs. 85 crore. This provision was later amended and simplified.

  • Banker to the Government

RBI is working as banker of the government and therefore all funds of both Central and State Governments are kept with it. It acts as an agent of the government and manages its public debt. RBI also offering “ways and means advance” to the government for short periods.

  • Banker’s Bank

RBI is also working as the banker of other banks working in the country. It regulates the whole banking system of the country, keep certain percentage of their deposits as minimum reserve, works as the lender of the last resort to its scheduled banks and operates clearing houses for all other banks.

  • Credit Control

RBI is entrusted with the sole authority to control credit created by the commercial banks by applying both quantitative and qualitative credit control measures like variation in bank rate, open market operation, selective credit controls etc.

  • Custodian of Foreign Exchange Reserves

RBI is entrusted with sole authority to determine the exchange rate between rupee and other foreign currencies and also to maintain the reserve of foreign exchange earned by the Government. The RBI also maintains its relation with International Monetary Fund (IMF).

  • Developmental Functions

RBI is also working as a development agency by developing various sister organizations like Agricultural Refinance Development Corporation. Industrial Development Bank of India etc. for rendering agricultural credit and industrial credit in the country.

On July 12, 1986, NABARD was established and has taken over the entire responsibility of ARDC. Half of the share capital of NABARD (Rs. 100 crore) has been provided by the Reserve Bank of India. Thus, the Reserve Bank is performing a useful function for controlling and managing the entire banking, monetary and financial system of the country.

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