Specifically, it looks for the possible implications of integration teen the financial and the real sector with specific focus on volatility of stock market fluctuations and output. In this paper we analyze the growth of the Indian stock markets and its effect on the economy as a whole. We also examine the Indian stock market on account of the process of financial liberalizing in India. The reform program in India and in many developing countries has been producing major changes in the functioning of financial markets.
Accordingly, there has been increasing participation of portfolio investors in stocks. We extend the Dobbin’s model to a closed economy working under excess capacity. The model integrates stock market with the real sector along the Keynesian effective demand principle. The model is further augmented to include open-economy implications of the stock market. Our analysis reveals that the Stock Market development unambiguously leads to output expansion through rise in investment in a closed economy.
Once economy is open, it involves adjustment in trade balance and money supply. This underscores the importance of international political framework through appropriate sequencing of reforms, introduction of flexible exchange rate regime and the need of package inter-related measures of liberalizing to be n place. JELL Classification: EYE, EYE . Keywords: Reforms, Volatility, Effective Demand. 3 1. Introduction Financial crises in the last decade have revealed that financial asset price volatility has the potential to undermine financial stability.
Available empirical evidence indicates that financial stability is endangered more by sudden shifts in volatility rather than by a sustained increase in the level of volatility. Understanding volatility is therefore central to risk management in an economy. In the aftermath of the many crises that the last decade has been witness to, return to the older order of regulated/restricted flows has been proposed by many economists and policymakers.
The clamor for restrictions on capital inflows has largely been on account of the notion that unregulated cross – border movement of portfolio capital causes “excessive” booms and busts and thus volatility/instability in the financial markets. Financial market volatility can have a wide repercussion on the economy as a whole. There is clear evidence of the important link between financial merchantability and public confidence. Policy makers therefore rely on market estimates of Latinity as a barometer of the vulnerability of financial markets.
The existence of excessive volatility or “noise” also undermines the usefulness of stock prices as a “signal” about the true intrinsic value of a firm, a concept that is core to the paradigm of informational efficiency of markets. Further, volatility estimation and forecasting have become a compulsory risk-?management exercise for economies and many financial institutions around the world ever since the first Basal Accord was established in 1996.
A stock exchange is defined as under section 2(3) of the Securities Contracts Regulation) Act, 1 956, as “any body of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities” Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i. E. Demand and supply for a particular stock). Functions of the Stock Exchange: i.
To facilitate liquidity and marketability of the outstanding equity and debt instruments. Ii. To contribute to economic growth through allocation of funds o the most efficient channel through the process of disinvestment to reinvestment. 4 iii. To provide instant valuation of securities caused by changes in the internal environment (that is, accompanied and industry wide factors). Such valuation facilitates the measurement of the Cost of capital and the rate of return Of the economic entities at the micro level. V. To ensure a measure of safety and fair dealing to protect investors’ interests. V. To induce companies to improve performance since the market price at the stock exchanges reflects the performance and this market price is readily available to investors. In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with the dawn of IT, most of the operations are done electronically and the stock markets have become almost paperless.
Now investors don’t have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet. 2. History 2. 1 The origin One of the oldest stock markets in Asia, the Indian Stock Market has a 200 year-old history. 18th East India Company was the dominant institution and by end of the century, Century business in its loan securities gained full momentum ass’s Business on corporate stocks and shares in Bank and Cotton presses started in Bombay.
Trading list by the end Of 1 839 got broader sass’s Recognition from banks and merchants to about half a dozen brokers sass’s Rapid development of commercial enterprise saw brokerage business attracting more people into the business sass’s The number of brokers increased to 60 1860-61 The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the “Share Mania” in India 1862-63 The number of brokers increased to about 200 to 250 1865
A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which had touched RSI. 2850 could only be sold at RSI. 87) 5 2. 2 Pre-luminescence Scenario – Establishment of Different Stock Exchanges 1874 With the rapidly developing share trading business, brokers used to gather at a street (now well known as “Dalai Street”) for the purpose of transacting business. 1875 “The Native Share and Stock Brokers’ Association” (also known as “The Bombay Stock Exchange”) was established in Bombay sass’s Development of cotton mills industry and set up of many others 1894
Establishment of “The Mohammedan Share and Stock Brokers’ Association” 1880 ass’s Sharp increase in share prices of jute industries in 1 asses was followed by a boom in tea stocks and coal 1908 “The Calcutta Stock Exchange Association” was formed 1920 Madras witnessed boom and business at ‘The Madras Stock Exchange” was transacted with 100 brokers. 1923 When recession followed, number of brokers came down to 3 and the Exchange was closed down 1934 Establishment of the Lahore Stock Exchange 1936 Merger of the Allah Stock Exchange with the Punjab Stock Exchange 1937 Re-organization and set up of the Madras Stock Exchange Limited (Pet.
Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies 1940 Attar Pradesh Stock Exchange Limited and Nagger Stock Exchange Limited was established 1944 Establishment of “The Hydrated Stock Exchange Limited” 1947 “Delhi Stock and Share Brokers’ Association Limited” and “The Delhi Stocks and Shares Exchange Limited” were established and later on merged into “The Delhi Stock Exchange Association Limited” 6 2. 3 Post Independence Scenario The depression witnessed after the Independence led to closure Of a lot Of exchanges in the country.
Lahore Stock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangor Stock Exchange Limited was registered in 1 957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were: . Bombay 2. Calcutta 3. Madras 4. Mohammedan 5. Delhi 6. Hydrated Bangor 7. 8. Indore Many more stock exchanges were established during sass’s, namely: ;Cochin
Stock Exchange (1980) ;Attar Pradesh Stock Exchange Association Limited (at Kanata, 1982) ;Pun Stock Exchange Limited (1982) ;Lithuania Stock Exchange Association Limited (1983) ;Kuwaiti Stock Exchange Limited (1984) ;Kanata Stock Exchange Limited (at Mangrove, 1 985) ;Magmas Stock Exchange Association (at Patina, 1986) ;Jasper Stock Exchange Limited (1989) ;Banner’s Stock Exchange Association Limited (1989) ;Sarasota Ketch Stock Exchange Limited (at Ratio, 1989) ;Fedora Stock Exchange Limited (at Abroad, 1990) ;Combaters Stock Exchange ;Merit Stock Exchange 7
At present, there are twenty one recognized stock exchanges in India which does not include the Over The Counter Exchange of India Limited (DECEIT) and the National Stock Exchange of India Limited (NISEI). Government policies during sass’s also played a vital role in the development of the Indian Stock Markets.
There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible from the following table: 1961* 1971* 1980* 1991 2001 2002 2003 No of stock exchanges 22 23 No of listed companies 1203 Market Capitalization 12 89 1 599 2265 6229 9871 9644 9413 27 68 1103 1 1 926 7493 319 (RSI billion) * end December the stock exchange Iambi only (Source: BEES & NOSE) 2. 4 Trading Pattern of the Indian Stock Market Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s).
They are divided into two categories: 8 2. 4. 1 Types of Transactions The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges: 9 Indian stock exchange allows a member broker to perform following activities: ;Act as an agent, ;Buy and sell securities for his clients and charge commission for the same, Act as a trader or dealer as a principal, ;Buy and sell securities on his own account and risk. . 5 Over The Counter Exchange of India (DECEIT) Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids and offers were made by open outcry. This age-old trading mechanism in the Indian stock markets used to create much functional inefficiency. Lack of liquidity and transparency, long settlement periods and Benjamin transactions are a few examples that adversely affected investors.
In order to overcome these inefficiencies, DECEIT as incorporated in 1990 under the Companies Act 1956. DECEIT is the first screen based nationwide stock exchange in India created by Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SIB Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and Cancans Financial Services. 0 2. 5. 1 Advantages of DECEIT ;Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across India ;The screen-based scriptures trading ensures transparency and accuracy of ricers ;Faster settlement and transfer process as compared to other exchanges ;Shorter allotment procedure (in case of a new issue) than other exchanges. 2. National Stock Exchange In order to lift the Indian stock market trading system on par with the international standards, on the basis of the recommendations of high powered Permian Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.
NOSE provides exposure to investors in two types of markets, namely: 1 Wholesale debt market 2. Capital market 2. 6. 1 Wholesale Debt Market – Similar to money market operations, debt market operations involve institutional investors and corporate bodies entering into transactions of high value in financial instruments like treasury bills, government securities, commercial papers etc. 2. 6. Trading at NOSE ;Fully automated screen-based trading mechanism ;Strictly follows the principle of an order-driven market ;Trading members are linked through a communication network ;This outwork allows them to execute trade from their offices ;The prices at which the buyer and seller are willing to transact will appear on the screen ;When the prices match the transaction will be completed ;A confirmation slip will be printed at the office of the trading member 2. 6. Advantages of trading at NOSE ;Integrated network for trading in stock market of India ;Fully automated screen based system that provides higher degree of transparency 11 ;Investors can transact from any part Of the country at uniform prices ;Greater functional efficiency supported by totally computerized network . 7 Bombay Stock Exchange (BEES) Trading in securities in India dates back to 1973, most of them being transactions in loan securities of the East India Company.
Bombay Stock Exchange is a voluntary non-profit making association of broker members. It emerged as a premier stock exchange after 1 sass. The increased pace of industrialization caused by the two world wars, protection to the domestic industries, and government’s fiscal policies aided the growth of new issues which, in turn, helped the BEES to prosper. BEES dominated the Indian capital market by accounting for more than 605 of the all-India turnover.