Indian Capital Markets – Opportunities and Challenges

The Indian Economy is a developing mixed economy ranked as the third largest by purchasing power parity and sixth largest by nominal GDP. With an average growth of 6 to 7 % annually, the Indian Economy is one of the world’s fastest growing major economy. Due to young population, low dependency ratio, healthy savings and investment rates and increasing integration with global economy, the long term growth prospects of the Indian economy are unquestionable. The sector that provides the major share of India’s GDP happens to be Services sector of which the financial services industry contributes around 37% of GDP.

For such a fast growing economy, capital formation is a pre requisite and in fact imperative. One factor that is then of great significance for Capital formation is a developed capital market. A robust capital market not only helps in mobilizing savings for accelerated capital formation through raising long term capital and promoting industrial growth but also provides a ready and liquid market for investors to be a part of the growth story of the nation.

In the present times, Indian Capital Markets are performing a plethora of functions. The financial intermediaries offer a range of technical and advisory services to entrepreneurs and act as a reliable guide regarding corporate performance as well. On the other hand, they also make generating foreign capital possible which in turn helps in bringing foreign technology that is important for economic development of the country.

The Indian Capital Market comprises of the following segments viz., Equity Markets, Debt Markets, Commodity Markets and Currency Markets. It is with respect to each of these components where the opportunities and challenges of Indian Capital markets lie.

The equity market has key constituents like retail investors, domestic institutional investors like mutual funds and insurance companies and foreign institutional investors. Increasing participation of retail investors is one of the daunting challenges of the Indian Capital Markets. Out of a population of 1 billion only 1% participate in equity segment and out of that, only a fraction are active. The need of the hour is greater depth and liquidity and lower transaction costs. While the Assets under Management of the mutual fund companies have traversed a growth path since the opening up of this sector to private players, there has been a slowdown due to the influence of the global economy. Ensuring investor protection and offering more diversified products for greater financial inclusion is the biggest challenge facing this segment. Foreign institutional investment has grown immensely too and they can now become qualified institutional buyers and invest even in debt markets including corporate debt, government securities and security receipts issued by Asset Reconstruction Companies. The key challenge again is the growth in this sector. There is a limitation to this growth due to taxation issues. These funds are being currently managed from tax efficient jurisdiction. A reform in this area is now imperative and urgent.

The next segment of capital market viz., Debt Market is still at a nascent stage. In well developed economies wherein bond markets are of a larger size than equity markets, the case is opposite in India. The debt segment and specifically the corporate bond market is a major area of opportunity. In order to harness this opportunity, generating domestic demand, improving market infrastructure and rationalising the tax regime are major areas of reform.

Another emerging asset class of which investors still remain wary of are commodity and currency markets. While commodity markets have been growing at a phenomenal pace, there are major limitations for various investment classes other that domestic institutional investors. Future holds promise as removal of these hurdles is work-in-progress. On the currency front, this segment has also witnessed consistent growth but a lot many opportunities still remain unexplored. Presence of a strong regulator will convert this challenge into an opportunity.

Understanding of all these aspects requires not only conceptual knowledge but also increasing the general level of awareness by keeping abreast with latest news and networking with industry experts. The Indian capital Markets are fertile ground for numerous opportunities in the future for practitioners, researchers, academicians and citizens of the country in general. Participate in the Indian Capital Markets and be a part of the nation’s growth story.

Dr. Meghna Dangi,
Program Coordinator, PGDFM,
AURO University.

Leave a Reply

Your email address will not be published. Required fields are marked *