Role and Importance of Financial Markets in the Indian Economy

In a developing economy such as India's, financial markets play a role that goes well beyond simply connecting individual savers to individual borrowers — they are a genuine engine of overall economic development.

• Mobilising savings for productive investment — India has always had a large pool of household savings; financial markets are what convert these scattered savings, which would otherwise sit idle or be held unproductively, into funds available for investment in industry, infrastructure, and services.
• Facilitating industrial growth and capital formation — by giving companies a reliable channel to raise the long-term capital markets (through equity and debt) needed for setting up new units, modernising existing plants, and expanding capacity, financial markets directly support the pace of industrialisation.
• Enabling the government to raise funds — the government (both central and state) meets a large part of its borrowing requirement, for development expenditure as well as for managing its fiscal deficit, by issuing government securities and treasury bills through the financial market, rather than relying solely on taxation or direct money creation.
• Providing a channel for foreign investment — a well-developed capital market, with transparent regulation, gives foreign investors (through Foreign Portfolio Investment in listed securities, and indirectly supporting Foreign Direct Investment as well) a credible route to invest in the Indian economy, bringing in foreign capital, and often foreign technology and expertise, alongside it.
• Providing liquidity and encouraging investment — because a well-functioning secondary market lets an investor exit an investment relatively easily, financial markets increase investors' willingness to commit funds to productive, long-term uses in the first place, which they would be more reluctant to do if their money were permanently locked in. …