Financial Innovation In Indian Capital Market

Abstract

Financial innovation has been one of the determinants of the growth of trade in financial services, notably the cross-border supply of these services. Consolidation through mergers and acquisitions particularly in the banking sector has boosted cross-border trade in financial services. Financial innovation is a continuous, dynamic process that entails the creation and subsequent popularization of new financial instruments, as well as new financial technologies, institutions, and markets. Financial innovation has experienced steady growth in the last decades and has arguably transformed the once relationship-focused financial intermediaries. With the advent of technology and deregulation of capital market there is a huge scope for bringing in innovative financial products in the Indian capital market. Indian capital market is largely characterized by the equity market with debt market and derivatives market lurking far-behind. This paper attempts to suggest a few of the innovative products that can be introduced in equity market (IDR, non-voting shares, debt and equity swaps), debt market (inflation linked bonds, junk bonds, specialized debt funds for infrastructure etc.), mutual funds and derivatives (carbon emission index and futures, weather derivatives, credit linked deposits, etc.). It also talks of the new pension scheme (NPS) as an innovative financial product meant for the Indian capital market. All these products or any other product, for that matter, would be beneficial only if it reduces cost, brings transparency and leads to optimal utilization of resources. Thus innovation is the call of the Indian markets but needs to be applied cautiously.