India’s maturing capital markets

The equity market in India is one of the most broad-based in the world, with the largest number of listed companies. The country’s two leading stock exchanges are the Bombay Stock Exchange, founded in 1875 and the National Stock Exchange (NSE), established in 1992. Trading is completely electronic at the bourses.

The NSE is the leader in trading derivatives, including a range of futures and options. Market turnover is much higher in the futures and options markets compared with the cash markets. The stocks of the larger companies are very liquid and have a lot of trading participation by foreign portfolio investors. There is also a thriving market in commodity futures, which includes both agricultural and industrial commodities.

Although the proportion of household savings in equities is low, domestic mutual funds have recently started gaining importance as an investment avenue for households

Stock and insurance markets

Apart from individual investors, foreign portfolio investors, domestic mutual funds and insurance companies are big investors in the capital markets. Although the proportion of household savings in equities is low, domestic mutual funds have recently started gaining importance as an investment avenue for households. The main benchmark equity indices are the Sensex and the Nifty, with a range of other indices.

According to World Bank indicators, India’s market capitalization to GDP ratio has been between 69 per cent and 76 per cent over the last three years. The number of initial public offerings (IPOs) and the amount raised reached an all-time high in 2017, driven by the listing of several insurance outfits. The Indian stock market has consistently traded at a premium to its peers, in keeping with the growth prospects of its companies.

India’s insurance sector has both public sector and private sector companies, although it is still dominated by the public sector. However, there are now several private sector players across all segments—life, general and health insurance. The government’s crop insurance policy has been a step towards mitigating the risks in farming, besides offering a measure of financial inclusion. As of 2015, the ratio of total insurance premium to GDP was 3.44 per cent, according to the Insurance Regulatory and Development Authority data. Pension funds in India are still in their infancy.

Capital, debt and commodity markets

While most funds are still raised from banks, non-bank finance is growing rapidly. India’s capital markets are one of the deepest and most advanced among the emerging markets, attracting billions of dollars of foreign portfolio investment. The primary issuance market has also been very active, enabling companies to raise equity for growth. India’s debt markets are dominated by the government, thanks to its large borrowing programme. The corporate debt market still has some way to go. At the moment it mostly caters to top-rated borrowers. Foreign funds in the debt markets are permitted, subject to limits periodically fixed by the RBI.

The capital market, mutual funds, and other capital market intermediaries are regulated by Securities and Exchange Board of India (SEBI), meanwhile Insurance Regulatory and Development Authority (IRDA) regulates the insurance sector. The Pension Funds Regulatory and Development Authority (PFRDA) regulates the pension funds. The Forward Markets Commission (FMC) is responsible for the commodity futures market and the exchanges and firms in that market. Meanwhile, small savings products are the responsibility of the central government. The finance ministry of the central government closely monitors the entire financial structure.