Role of stock exchange in economic development pdf
The role of stock markets as a source of economic growth has been widely debated. It is well recognised that stock markets influence economic activity through the creation of liquidity.
Liquid financial market was an important enabling factor behind most of the early innovations that characterised the early phases of the Industrial Revolution.
Recent advances in this area reveal that stock markets remain an important conduit for enhancing development. Many profitable investments necessitate a long-term commitment of capital, but investors might be reluctant to relinquish control of their savings for long periods. Liquid equity markets make investments less risky and more attractive. At the same time, companies enjoy permanent access to capital raised through equity issues.
By facilitating longer-term and more profitable investments, liquid markets improve the allocation of capital and enhance the prospects for long-term economic growth. Furthermore, by making investments relatively less risky, stock market liquidity can also lead to more savings and investments.
Over the years, the stock market in India has become strong. The number of stock exchanges increased from 8 in to 9 in to 21 in and further to 23 as at end- March The number of listed companies also moved up over the same period from 1, to 2, and thereafter to 5, in and 9. In , India ranked twenty-first in the world in terms of market capitalisation, nineteenth in terms of total value traded and second in terms of number of listed domestic companies.
However, the patterns of demand for capital have undergone significant changes during the last two decades and improved stock market activity. Financial Institutions raised money through Government- guaranteed bonds at low rates of interest, which, in turn, lent funds at concessional rates of interest. This system provided corporates a cushion to absorb the relatively high risk of implementing new projects. This, in turn, discouraged the corporates to raise risk capital from equity markets. Institutions had to raise resources at market related rates.
At the same time, the market has witnessed the Introduction of several new customised bonds at maturities tailored to suit Investor needs and with market-driven coupons.
ROLE OF STOCK MARKET IN ECONOMY DEVELOPMENT | Interal Res journa Managt Sci Tech - yfyrurusus.web.fc2.com
Along with this development, a number of measures were initiated to reform the stock markets, which helped to improve the overall activity in the stock market significantly. The turnover ratio increased from a low of 6.
The Indian capital market has experienced a significant structural transformation over the years. It now compares well with those in developed markets. This was deemed necessary because of the gradual opening of the economy and the need to promote transparency in alternative sources of financing.
What is the Role of Stock Markets in the Economic Growth of India?
The regulatory and supervisory structure has been overhauled with most of the powers for regulating the capital market having been vested with the Securities and Exchange Board of India SEBI. Apart from changes in the fundamental factors, information asymmetries and the associated constraints to efficient price discovery remain at the heart of the volatile movements in stock prices.
The extent of stock price volatility is also influenced by the extent of integration between the domestic and international capital markets as well as the regulatory framework governing the stock market.
Stock market volatility has tended to decline in recent years, with the coefficient of variation CV in the BSE Sensex working out to Asset price bubbles entail significant risks in the form of higher inflation when the bubble grows in size and in the form of financial instability and lost output when the bubble bursts.
Data Response Question - Economic Growth
Monetary and fiscal authorities, therefore, closely watch the asset market developments. The positive wealth effect resulting from bull runs could impart a first round of risk to inflation. If the Bull Run is prolonged, a second round of pressure on prices may result from subsequent upward wage revisions.
Since financial assets are used as collaterals, asset booms may also give rise to large credit expansion.
When domestic supply fails to respond to the rising demand, it could give rise to higher external current account deficit. The asset price cycles may follow. When the asset prices collapse, firms may face severe financing constraints as a result of declining value of their collaterals, making lenders reluctant to lend at a scale they do when asset prices are rising. Recognising these alternative complexities emanating from asset market bubbles, information on asset prices is being increasingly used as a critical input for the conduct of public policies.
Exchanges in the country, offer screen based trading system. There were 9, trading members registered with SEBI as at end March Over the period, the market capitalization has grown indicating more companies using the trading platform of the stock exchange.
The All-India market capitalization was around Rs. The market capitalization ratio is defined as market capitalisation of stocks divided by GDP. It is used as a measure to denote the importance of equity markets relative to the GDP. It is of economic significance since market is positively correlated with the ability to mobilize capital and diversify risk. The All- India market capitalisation ratio increased to NSE Market Capitalisation ratio was The trading volumes on stock exchanges have been witnessing phenomenal growth over the past years.
The trading volume, which peaked at Rs. However, from onwards the trading volumes picked up. It stood at Rs. During , the trading volumes on the CM segment of Exchanges increased significantly by The relative importance of various stock exchanges in the market has undergone dramatic changes over a decade. The increase in turnover took place mostly at the big stock exchanges.
The NSE yet again registered as the market leader with Top 2 stock exchanges accounted for However, the year witnessed a favourable movement in the Nifty 50 Index, wherein it registered its all time high of The point-to-point return of Nifty 50 was