This paper traces the story of Indian financial sector over the period 1950β2015. In identifying the trends and
turns of Indian financial sector, the paper adopts a three period classification viz., (a) the 1950s and 1960s,
which exhibited some elements of instability associated with laissez faire but underdeveloped banking; (b)
the 1970s and 1980s that experienced the process of financial development across the country under
government auspices, accompanied by a degree of financial repression; and (c) the period since the 1990s till
date, that has been characterized by gradual and calibrated financial deepening and liberalization. Focusing
more the third period, the paper argues that as a consequence of successive reforms over the past 25 years,
there has been significant progress in making interest and exchange rates largely market determined, though
the exchange rate regime remains one of managed float, and some interest rates remain administered.
Considerable competition has been introduced in the banking sector through new private sector banks, but
public sector banks continue have a dominant share in the market. Contractual savings systems have been
improved, but pension funds in India are still in their infancy. Similarly, despite the introduction of new
private sector insurance companies coverage of insurance can expand much further, which would also
provide greater depth to the financial markets. The extent of development along all the segments of the
financial market has not been uniform. While the equity market is quite developed, activities in the private
debt market are predominantly confined to private placement form and continue to be limited to the bluechip
companies. Going forward, the future areas for development in the Indian financial sector would
include further reduction of public ownership in banks and insurance companies, expansion of the
contractual savings system through more rapid expansion of the insurance and pension systems, greater spread of mutual funds, and development of institutional investors. It is only then that both the equity and
debt markets will display greater breadth as well as depth, along with greater domestic liquidity. At the same
time, while reforming the financial sector, the Indian authorities had to constantly keep the issues of equity
and efficiency in mind.
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