Posted by The economy of a country depends on the fundamental mechanism of savings and investment of financial capital, leading to sustainable growth and development. The impetus for the economic activities as a result of the flow of funds is provided by entities that have surplus to other entities seeking funds. For effectively implementing this mechanism, it is critical to develop “Markets”.
A market is a place where buyers and sellers meet to exchange goods, services or even financial products / instruments for a consideration. This consideration is usually money. Markets can also be defined as channels through which buyers and sellers exchange goods, services and resources. There are broadly three types of markets:
- A product market where goods and services are traded.
- A factor market where labor, capital and land are exchanged.
- A financial market where financial claims are traded.
The broad classification of the different types of markets in the Indian Financial System is illustrated as:
Financial Markets in India
- Money Markets.
- Capital Markets (Debt & Equity Markets).
- Currency Markets.
- Commodity Markets.
Thus, the different types of markets may be broadly classified as Money Markets, Capital Markets, Debt Markets, Equity Markets, Currency Markets and Commodity Markets.
Emergence of the concept of Markets and Marketplace: Historical Perspective: The history of markets dates back more than five thousand years in the present-day Iraq (also referred to as the “Fertile Crescent” in ancient Mesopotamia), when camels and donkeys were used to carry goods – including precious stones, ivory, weapons, etc. – between the ancient cities of Babylon and Ur. From time immemorial, man has felt a need to exchange goods. The desire to trade (initially goods were bartered – exchange of one goods for another of equivalent values as perceived and agreed upon by the buyer and seller – when the concept of currency did not exist) led to the formation of marketplace – where buyers and sellers meet.
Incidentally, the development of trade and establishment of markets in the ancient civilization resulted in the development of culture. Writing originated as a means of recording information pertaining to economic activity. The earliest method of recording information was by making “Tally marks” on baked clay. These marks were made to record the inventory of grain, livestock, oil and other goods that were traded. These written records were used by tax collectors and merchants. Mathematics also originated in this era, to compute the costs and set prices. The “wheel” was also invented to facilitate faster movement of goods between different locations. Thus, trade and developments of markets led to growing commerce and evolution of knowledge, culture and technology.
Another example of existence of markets in ancient period is the central marketplace in Agora in Ancient Athens. Traders used to sell their goods – fish, meat, clothing, perfumes, jewelry, pottery, metal artifacts, etc. in separate stalls.
These references confirming the existence of markets in ancient civilization provide an indication of the extent to which they have influenced economic activity, growth and development over several centuries.
Spot Market Transactions: Spot transaction results in immediate delivery of a good (or financial product / instrument) for a particular consideration between the buyer and seller. Marketplaces that facilitate spot transaction is referred to as the spot (or cash) market and transaction price is usually referred to as the spot price.
Buyers and sellers meet face to face and deals are struck. These are traditional markets. Example of a cash market is a mandi where food grains are sold in bulk. Farmers would bring their products to this market, and merchants/traders would immediately purchase the products, and they settle the deal in cash and take or give delivery immediately. Spot markets thus call for immediate delivery of goods against actual payment.
Contemporary Markets: The present-day markets gradually evolved over several hundreds of years. The objective of establishing a marketplace is to facilitate a congregation of buyers and sellers in a single location, to facilitate their interaction. This is traditionally a physical marketplace – where buyers and sellers need to by physically present. Sellers need to transport their goods, to be able to negotiate their sales. Once a sale is completed, then the delivery of the goods is also made instantaneously on receipt of a consideration.
With the advent of the Informational Technology (IT) revolution, the physical marketplace has gradually been replaced with electronic trading platform. In an IT-enabled environment, buyers and sellers from different locations can transact business in an electronic marketplace. Hence, physically presence is not necessary for the exchange of goods or services for a consideration. Electronic trading and settlement of transactions has created a revolution in global securities markets.
The financial markets in India have evolved over the last six decades since independence. The five-year plans led to the growth of infrastructure and economic development. It was only in 1991, when India liberalized its economy – from decades of import/export and manufacturing restrictions – that importance was given to financial and securities markets reforms.
The need for institutional intervention in terms of banking and non-banking financial intermediaries was ascertained. Though Development Financial Institutions (DFI) were in existence from 1950’s and 1960’s, the credit distribution was skewed towards the large-scale industries. The entrepreneur having a small and medium scale enterprise (SME) and micro-SME sector was largely ignored. The free flow of capital from household savings and investments towards sectors including capital markets, insurance and pension / provident fund were liberalized in the 1990’s and after 2000.
