NISM Series X-A · Chapter 5: Introduction to Indian Financial Markets

L1 · Foundation

Foundation — The Indian economy, financial markets and their regulators

How financial markets keep the economy running, money versus capital markets and primary versus secondary markets, and the full regulatory architecture from the Ministry of Finance and MCA through RBI, SEBI, IRDAI and PFRDA to Self-Regulatory Organizations.

13 min read · Worth 3% of the paper · Written from pages 89–103 of the official NISM workbook · Updated 17 September 2026

5.1 The Indian economy

In short: India once lived mainly off farming. Today, services and manufacturing make up three-fourths of its output. That kind of growth needs a strong financial system behind it.

"The Indian economy has EVOLVED FROM AGRICULTURE-BASED to one DOMINATED BY SERVICES AND MANUFACTURING, contributing THREE-FOURTHS of its GDP. Economic growth DEPENDS ON A ROBUST FINANCIAL SYSTEM for access to resources".

How each market serves the economy:

Market	Role
Banks	"provide CREDIT to corporates and individuals, and SAVINGS CHANNELS"
Securities markets	"help businesses RAISE FUNDS through EQUITY AND DEBT OFFERINGS"
Foreign exchange markets	"IMPACT IMPORT COSTS and enable GLOBAL INVESTMENTS while MITIGATING CURRENCY RISK"
Commodity markets	"MANAGE PRICE VOLATILITY"
Insurance	"PROTECTS AGAINST FINANCIAL SHOCKS, PROMOTING SAVINGS AND INVESTMENTS"

"Well-regulated, developed markets are ESSENTIAL FOR SUSTAINED GROWTH".

5.2.1 Key features of the Indian financial markets

A financial market is a meeting point. People with spare money (lenders or investors) meet people who need money (borrowers or businesses). Banks, mutual funds and insurance companies stand in the middle and help the money move.

"Financial markets facilitate the EFFICIENT ALLOCATION OF RESOURCES by CHANNELING SURPLUS FUNDS FROM LENDERS (or investors) TO BORROWERS (or businesses). INTERMEDIARIES like BANKS, MUTUAL FUNDS, AND INSURANCE COMPANIES help in this process".

"Markets AGGREGATE FUNDS, PROVIDE LIQUIDITY, and ENABLE INFORMED DECISION-MAKING BY DISSEMINATING RELEVANT INFORMATION".

The two categorisations

By tenor	Definition
Money Markets	"SHORT-TERM lending/borrowing"
Capital Markets	"LONG-TERM funding via DEBT AND EQUITY"

By stage	Definition
Primary markets	"NEW SECURITIES ISSUANCE"
Secondary markets	"TRADING AMONG INVESTORS"

"Market participants include BANKS, BROKERS, DEPOSITORIES, and INSTITUTIONAL INVESTORS like MUTUAL FUNDS AND PENSION FUNDS, which ENHANCE LIQUIDITY AND ASSET PRICING".

"Beyond financial markets, COMMODITIES, FOREX, INSURANCE, AND PENSION markets also play crucial roles in ECONOMIC STABILITY AND RISK MANAGEMENT".

5.3 The regulators

Why regulate at all? To protect investors. The aim is that people make their money choices with a fair idea of how each market works.

"Regulation of the financial markets is motivated by the NEED TO SAFEGUARD THE INTERESTS OF INVESTORS. What is PARAMOUNT is to ensure that investors MAKE INFORMED DECISIONS about their financial transactions ON THE BASIS OF A FAIR UNDERSTANDING of various markets".

Regulator	Regulates
RBI	"COMMERCIAL BANKS"
SEBI	"SECURITIES MARKETS AND COMMODITY"
IRDAI	"INSURANCE COMPANIES"
PFRDA	"THE PENSION SECTOR"

"The CENTRAL GOVERNMENT exercises a certain level of OVERSIGHT on these and other regulatory institutions".

5.3.1 Ministry of Finance — the five departments

The Ministry of Finance works through five departments. The chapter first names two of them.

"The Ministry of Finance through its DEPARTMENT OF FINANCIAL SERVICES regulates and oversees the activities of the BANKING SYSTEM, INSURANCE AND PENSION sectors".
"The DEPARTMENT OF ECONOMIC AFFAIRS regulates the CAPITAL MARKETS and its participants".

Department	Responsibility
a) Economic Affairs	"the NODAL AGENCY of the Central Government to FORMULATE AND MONITOR INDIA'S MACROECONOMIC POLICIES, covering MONETARY AND FISCAL POLICY as well as the functioning of the CAPITAL MARKET INCLUDING STOCK EXCHANGES"
b) Expenditure	"the administration of various FINANCIAL RULES AND REGULATIONS including SERVICE CONDITIONS OF ALL CENTRAL GOVERNMENT EMPLOYEES... also involved with FINANCIAL ASSISTANCE TO STATES AND BORROWINGS BY STATES"
c) Revenue	"control over matters relating to DIRECT AND INDIRECT TAXES of the Central Government, through two statutory boards, viz., the CENTRAL BOARD OF DIRECT TAXES and CENTRAL BOARD OF EXCISE AND CUSTOMS"
d) Financial Services	"administers government policies relating to: PUBLIC SECTOR BANKS; TERM-LENDING FINANCIAL INSTITUTIONS; LIFE INSURANCE AND GENERAL INSURANCE; PENSION REFORMS"
e) Investment and Public Asset Management	"all matters relating to the DISINVESTMENT OF CENTRAL GOVERNMENT EQUITY from Central Public Sector undertakings... also concerned with the FINANCIAL POLICY RELATING TO THE UTILIZATION OF PROCEEDS OF DISINVESTMENT"

5.3.2 Ministry of Corporate Affairs

This ministry looks after company law. It has three jobs in this chapter: run the company laws, run the competition law, and watch over three professional bodies.

"primarily concerned with administration of the COMPANIES ACT 2013, the COMPANIES ACT 1956, the LIMITED LIABILITY PARTNERSHIP ACT, 2008 and other allied Acts... mainly for REGULATING THE FUNCTIONING OF THE CORPORATE SECTOR in accordance with law".

"also responsible for administering the COMPETITION ACT, 2002 to PREVENT PRACTICES HAVING ADVERSE EFFECT ON COMPETITION, to PROMOTE AND SUSTAIN COMPETITION in markets, to PROTECT THE INTERESTS OF CONSUMERS through the commission set up under the Act".

"it exercises supervision over the THREE PROFESSIONAL BODIES, namely, INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI) and the INSTITUTE OF COST ACCOUNTANTS OF INDIA (ICAI) which are constituted under three separate Acts of the Parliament".

5.3.3 Registrar of Companies

The RoC is where a company is born on paper. It registers the company and then checks that it follows the law.

"The Registrar of Companies (RoC) is the authority appointed under the COMPANIES ACT to REGISTER COMPANIES and to ENSURE THAT THEY COMPLY WITH THE PROVISIONS OF THE LAW".

5.3.4 Reserve Bank of India

The Preamble sets out what the RBI exists to do. It has four parts:

"to REGULATE THE ISSUE OF BANK NOTES AND KEEPING OF RESERVES with a view to SECURING MONETARY STABILITY IN INDIA".
"and generally to OPERATE THE CURRENCY AND CREDIT SYSTEM of the country to its advantage".
"to have a MODERN MONETARY POLICY FRAMEWORK to meet the challenge of an increasingly complex economy".
"to MAINTAIN PRICE STABILITY WHILE KEEPING IN MIND THE OBJECTIVE OF GROWTH".

The main functions:

"FORMULATES, IMPLEMENTS AND MONITORS THE MONETARY POLICY", with the objective of "maintaining PRICE STABILITY while keeping in mind the objective of GROWTH".
"REGULATOR AND SUPERVISOR OF THE FINANCIAL SYSTEM".
"MANAGER OF FOREIGN EXCHANGE".
"ISSUER OF CURRENCY".
"REGULATOR AND SUPERVISOR OF PAYMENT AND SETTLEMENT SYSTEMS".
"BANKER TO THE GOVERNMENT: performs MERCHANT BANKING FUNCTION for the CENTRAL AND THE STATE GOVERNMENTS; also acts as their BANKER".
"BANKER TO BANKS: maintains BANKING ACCOUNTS OF ALL SCHEDULED BANKS".

5.3.5 Securities and Exchange Board of India

SEBI was set up by law, the SEBI Act of 1992. It is the main watchdog of India's securities markets.

"a STATUTORY BODY appointed by an ACT OF PARLIAMENT (SEBI ACT, 1992), is the PRIMARY REGULATOR OF SECURITIES MARKETS in India".

The Preamble: "to PROTECT THE INTERESTS OF INVESTORS IN SECURITIES and to PROMOTE THE DEVELOPMENT OF, and to REGULATE THE SECURITIES MARKET and for matters connected therewith or incidental thereto".

Functions:

"REGULATING THE BUSINESS IN STOCK EXCHANGES and other securities markets".
"REGISTER AND REGULATE THE WORKING OF INTERMEDIARIES associated with the securities market such as STOCK BROKERS, AUTHORISED PERSONS, SHARE TRANSFER AGENTS, BANKERS TO AN ISSUE".
"PROHIBIT FRAUDULENT AND UNFAIR TRADE PRACTICES, INSIDER TRADING relating to securities markets".
"POWER TO CALL FOR INFORMATION, UNDERTAKE INSPECTION, CONDUCT INQUIRIES AND AUDITS, SUMMON WITNESSES from such intermediaries".
"PROMOTE INVESTOR EDUCATION AND TRAINING OF INTERMEDIARIES".

5.3.6 IRDAI

IRDAI does for insurance what SEBI does for securities. It licenses insurers, approves their products, sets rules for agents and protects policyholders.

"regulates the insurance sector in accordance with the terms of the IRDA ACT OF 1999. IRDAI is the LICENSING AUTHORITY for insurance companies and DEFINES THE CAPITAL AND NET-WORTH REQUIREMENTS".

"REGISTERING insurance companies, CLEARING INSURANCE PRODUCTS, LICENSING and ESTABLISHING NORMS for the intermediaries and PROTECTING POLICY HOLDERS' INTEREST".
"defines the rules for the TERMS AND CONDITIONS of insurance contracts such as SUM ASSURED, SURRENDER VALUE, SETTLEMENT OF CLAIMS, NOMINATION AND ASSIGNMENT, INSURABLE INTEREST".
"REGULATES DISTRIBUTION by laying down the QUALIFICATION AND TRAINING REQUIREMENTS of intermediaries and the PAYMENT OF COMMISSION to distributors".
"SUPERVISES THE FUNCTIONING OF THE TARIFF ADVISORY COMMITTEE that DETERMINES THE RATES FOR GENERAL INSURANCE PRODUCTS. It also lays down the modalities for INVESTMENT OF FUNDS by insurance companies".

5.3.7 PFRDA

"the authority entrusted to act as a regulator of the pension sector under the PFRDA ACT, 2013. PFRDA regulates the NATIONAL PENSION SYSTEM (NPS) and any other pension scheme specified under its ambit. It is responsible for REGISTERING the various constituents such as the FUND MANAGERS, CUSTODIANS, CENTRAL RECORD KEEPING AGENCY AND TRUSTEE BANKS".

"The Act and its provisions apply to the NPS and OTHER PENSION SCHEMES NOT REGULATED BY ANY OTHER ENACTMENT. The NPS will be based on DEFINED CONTRIBUTIONS. It will also offer a MENU OF INVESTMENT CHOICES AND FUND MANAGERS".

Functions:

"REGULATING the NPS".
"APPROVING the schemes and their terms and investment guidelines".
"REGISTERING AND REGULATING INTERMEDIARIES".
"PROTECTING THE INTERESTS OF THE SUBSCRIBERS by ensuring funds are managed according to the mandate, COSTS OF MANAGEMENT ARE REASONABLE and establishing a MECHANISM FOR REDRESSAL".
"EDUCATING SUBSCRIBERS AND THE GENERAL PUBLIC on matters relating to retirement savings".

5.3.8 Self-Regulatory Organizations

An SRO is a body of market players that helps police its own members. It still works under SEBI. Note one exclusion in the definition: a stock exchange is not an SRO under these rules.

"According to SEBI (Self-Regulatory Organizations) REGULATIONS, 2004, 'Self-Regulatory Organisation' means an ORGANIZATION OF INTERMEDIARIES WHICH REPRESENTS A PARTICULAR SEGMENT OF THE SECURITIES MARKET and which is DULY RECOGNIZED BY SEBI BUT EXCLUDES A STOCK EXCHANGE".

"an SRO needs to be REGISTERED AND RECOGNIZED BY SEBI after a registration process that lays down norms for PROFESSIONAL COMPETENCE OF THE BOARD, INFRASTRUCTURE AND CAPITAL REQUIREMENTS".
"An SRO must ALWAYS ABIDE BY THE DIRECTIONS OF SEBI and ACT IN THE BEST INTEREST OF INVESTORS".
"SEBI also NOMINATES DIRECTORS ON THE BOARD of the SRO".
"The SRO can also CONDUCT INSPECTION AND AUDIT OF ITS MEMBERS".
"It is BOUND TO REPORT ANY VIOLATIONS OR NON-COMPLIANCE BY ANY OF ITS MEMBERS TO SEBI".

Think of it like this

Four regulators, four boxes

The simplest map in the chapter, and the most examined: RBI → commercial banks. SEBI → securities markets and commodity. IRDAI → insurance companies. PFRDA → the pension sector. Above all four, "the CENTRAL GOVERNMENT exercises a certain level of OVERSIGHT", and alongside them sits the FSDC, which is not a regulator at all but a government-established body watching financial stability, financial sector development and financial inclusion across the whole system.

Money market versus capital market is about time, not size

Students often assume capital markets are for big money and money markets for small. The chapter's division is purely by tenor: money markets are "short-term lending/borrowing" — later specified as under one year — while capital markets are "long-term funding via debt and equity." Cut the same market a second way and you get primary ("new securities issuance") and secondary ("trading among investors"). Every instrument in this syllabus sits somewhere in that two-by-two grid.

The Ministry of Finance is really five ministries

Two of its five departments matter most for an investment adviser, and they split the financial sector between them. Department of Economic Affairs handles "MONETARY AND FISCAL POLICY as well as the functioning of the CAPITAL MARKET INCLUDING STOCK EXCHANGES." Department of Financial Services handles "PUBLIC SECTOR BANKS; TERM-LENDING FINANCIAL INSTITUTIONS; LIFE INSURANCE AND GENERAL INSURANCE; PENSION REFORMS." Capital markets to one; banks, insurance and pensions to the other. The remaining three — Expenditure, Revenue, DIPAM — deal with spending, taxes and disinvestment.

RBI wears seven hats at once

The list is worth memorising as a sequence rather than a jumble: it sets monetary policy, regulates and supervises the financial system, manages foreign exchange, issues currency, regulates payment and settlement systems, is banker to the Government (including the merchant banking function for the Centre and the states), and is banker to banks (maintaining "banking accounts of all scheduled banks"). The monetary policy objective is stated with care: "maintaining PRICE STABILITY while keeping in mind the objective of GROWTH" — stability first, but not stability alone.

SEBI protects, develops and regulates — in that order

The Preamble names three jobs and puts them in a deliberate sequence: "to PROTECT THE INTERESTS OF INVESTORS in securities and to PROMOTE THE DEVELOPMENT OF, and to REGULATE THE SECURITIES MARKET." Protection first, development second, regulation third. It explains why SEBI's function list ends not with an enforcement power but with "PROMOTE INVESTOR EDUCATION AND TRAINING OF INTERMEDIARIES" — an educated investor needs less protecting.

An SRO is everything except a stock exchange

The definition carries an explicit carve-out that questions love: an SRO is "an organization of intermediaries which represents a particular segment of the securities market and which is duly recognized by SEBI BUT EXCLUDES A STOCK EXCHANGE." The relationship with SEBI runs in both directions — SEBI nominates directors onto the SRO board, and the SRO is "BOUND TO REPORT ANY VIOLATIONS... BY ANY OF ITS MEMBERS TO SEBI." Self-regulation here means delegated regulation, not independence.

IRDAI writes the fine print of your policy

The chapter shows how deep insurance regulation goes into the contract itself. IRDAI "defines the rules for the TERMS AND CONDITIONS of insurance contracts such as SUM ASSURED, SURRENDER VALUE, SETTLEMENT OF CLAIMS, NOMINATION AND ASSIGNMENT, INSURABLE INTEREST." It also clears the products, licenses the intermediaries, sets their training requirements, caps the commission, prescribes how insurers may invest their funds, and supervises the Tariff Advisory Committee that fixes general insurance rates.

Defined benefit to defined contribution — who carries the risk

The chapter records a quiet but enormous shift. The government pension moved "from DEFINED BENEFIT structure, where all retired employees of a particular rank get the SAME PENSION WITH NO CONTRIBUTIONS BY THE EMPLOYEE, to a DEFINED CONTRIBUTION structure, where the employee AND the employer contribute and the pension received WILL DEPEND UPON THE FUND ACCUMULATED." Under the old system the employer bore the investment risk; under the new one the employee does. That single change is why the NPS exists, why PFRDA exists, and why retirement planning is now a core advisory service.

Key terms in this chapter

Account Aggregator: An RBI-licensed financial entity that consolidates customer information and shares it with third parties, only with the customer's express consent, which may be revoked at any time.
Alternative Investment Fund: A fund that privately pools money and deploys it under a defined investment policy for sophisticated investors.
Asset Management Company: An investment specialist permitted to offer securities called units representing participation in a pool of money, used to create a mutual fund portfolio.
Base and quoting currency: In a currency pair such as USD/INR, the first currency is the base currency and the second is the quoting currency.
Board for Financial Supervision (BFS): The body guiding RBI's supervisory function, undertaking consolidated supervision of banks, all India financial institutions, NBFCs, primary dealers, payments banks, small finance banks and credit information companies.
Call money: Overnight lending and borrowing in the money market. Short-notice money extends up to fourteen days. Together with Treasury Bills these are the most significant segments of the Indian money market.
Capital market: The market for long-term funding through debt and equity.
Clearing corporation: The body ensuring confirmation, settlement and delivery of exchange transactions, with risk management systems so the system is protected if a member cannot pay.
Credit Information Company (CIC): An entity maintaining the credit reporting system, governed by the CIC (Regulation) Act 2005, CIC Rules 2006 and CIC Regulation 2006. The four in India are TransUnion CIBIL, Experian, Equifax and CRIF High Mark.
Custodian: An intermediary, usually a large bank, that holds securities and manages bank accounts for institutional investors, handles post-trade delivery and money, collects benefits and rights, and maintains records.
Defined benefit versus defined contribution: Under defined benefit all retired employees of a rank get the same pension with no employee contribution. Under defined contribution both employee and employer contribute and the pension depends on the fund accumulated.
Department of Economic Affairs: The nodal agency of the Central Government for macroeconomic policy, covering monetary and fiscal policy and the functioning of the capital market including stock exchanges.
Department of Financial Services: The Ministry of Finance department administering policies on public sector banks, term-lending financial institutions, life and general insurance, and pension reforms.
Depository: A single point for electronic holding of financial assets. Demat form is a precondition for a security to be eligible to trade in the secondary market. India has two: NSDL and CDSL.
Depository participant (DP): An entity that opens and maintains investor demat accounts and helps investors receive and deliver securities. DPs act as agents of the depositories, and brokers and banks offer DP services.
EPFO: The Employee Provident Fund Organisation, which administers and supervises the Employee Provident Fund with contributions from both employee and employer, part of the employer's share funding the Employee Pension Scheme.
FBIL: Financial Benchmark India Pvt. Ltd., which publishes daily reference rates for USD/INR, EUR/INR, GBP/INR and JPY/INR on Mumbai business days.
Free Full Credit Report (FFCR): The report including the credit score that RBI has directed credit information companies to furnish to individual borrowers once in a calendar year.
FSDC: Financial Stability and Development Council, a government-established body that monitors and addresses financial stability, financial sector development and financial inclusion. It is not a sector regulator.
Housing Finance Company: A company whose primary business is lending for the purchase of property or real estate. Regulation moved from the National Housing Bank to the Reserve Bank of India.
Interbank segment: The part of the spot forex market where banks make the market by giving two-way quotes for buying and selling a currency. In the merchant segment, merchants are price takers.
KYC registration agency: A body maintaining investor verification records in a central database for intermediaries. For individuals it is the CKYC Registry and for non-individuals the KRA, maintained by bodies such as CVL, CAMS and NDML.
Money market: The part of the financial market where instruments with short term maturities of under one year are traded, such as call money, commercial paper, certificates of deposit, commercial bills and Treasury Bills.
National Pension System (NPS): A voluntary, defined contribution retirement savings scheme for government employees and the general public, regulated by PFRDA, offering different fund managers and investment choices.
Non-Banking Finance Company (NBFC): A company engaged in loans and advances, leasing, hire purchase, insurance or chit business. It cannot accept demand deposits, issue cheques, or offer DICGC deposit insurance, and fills lending gaps banks cannot reach.
Payments bank: An RBI-notified bank for financial inclusion that may accept current and savings deposits up to Rs 1,00,000 and issue ATM or debit cards but not credit cards, and which cannot undertake any lending activities.
Portfolio manager: An investment specialist who does not offer any security and is not permitted to pool investor money, acting on behalf of the investor in creating and managing a portfolio.
Primary market: The market for new securities issuance, which enables capital raising.
Registrar and Transfer agent: An intermediary holding investor records and carrying out dividend payment, e-voting communication and, for mutual funds, investor transactions and detail updates.
Registrar of Companies: The authority appointed under the Companies Act to register companies and ensure they comply with the provisions of the law.
Secondary market: The market where existing securities are traded among investors, providing liquidity and price discovery.
Securities under SCRA Section 2(h): Shares, derivatives, collective investment scheme units, SARFAESI security receipts, mutual fund units, special purpose entity certificates, government securities, Central Government-declared instruments, and rights or interest in securities. Unit linked insurance policies are expressly excluded.
Self-Regulatory Organisation: Under SEBI (SRO) Regulations 2004, an organization of intermediaries representing a segment of the securities market and recognized by SEBI, but expressly excluding a stock exchange.
Small Finance Bank: An RBI-approved bank providing savings and banking facilities and supplying credit to small businesses, marginal farmers, micro and small industries and the unorganized sector.
Tariff Advisory Committee: The body whose functioning IRDAI supervises, which determines the rates for general insurance products.
Term insurance: A pure risk protection product with no benefit on maturity. If the insured event occurs the sum assured is paid to the beneficiaries.
Third party administrator: An entity used to process health insurance claims. Surveyors and loss assessors, by contrast, assess claims and the quantum of loss for general insurers.

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Original explanatory writing based on the official NISM workbook for Series X-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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