Development of Securities Markets: The Indian Experience

Asatisfactory pace of economic growth in any economy is contingent upon availability of adequate capital. A well-developed securities market, while acting as a provider of funding for economic activity at the macro level, plays specific roles in an economy: it diffuses stress on the banking sector by diversifying credit risk across the economy, supplies funds for long-term investment needs of the corporate sector, provides market-based sources of funds for meeting the government’s financing requirements, provides products with the flexibility to meet the specific needs of investors and borrowers, and allocates capital more efficiently. The main impulse for developing securities markets, including both the equity and debt segments, depends on country-specific histories and, more specifically in the context of the financial system, it relates to creating more complete financial markets, preventing banks from taking on excessive credit, risk diversification in the financial system, financing government debt, conducting monetary policy, sterilizing capital inf lows, and providing a range of long-term assets. Prior to the early 1990s, most financial markets in India faced pricing controls, entry barriers, transaction restrictions, high transaction costs, and low liquidity. A series of reforms since the early 1990s have aimed to develop the various segments of financial markets by phasing out the