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Unit 4: Indian Capital Market

4.3 Functions and Role of Indian Capital Market Notes

Like the money market capital market is also very important. It plays a significant role in the
national economy. A developed, dynamic and vibrant capital market can immensely contribute
for speedy economic growth and development.
Let us get acquainted with the important functions and role of the capital market.
1. Mobilization of Savings: Capital market is an important source for mobilizing idle savings
from the economy. It mobilizes funds from people for further investments in the productive
channels of an economy. In that sense it activates the ideal monetary resources and puts
them in proper investments.
2. Capital Formation: Capital market helps in capital formation. Capital formation is net
addition to the existing stock of capital in the economy. Through mobilization of ideal
resources it generates savings; the mobilized savings are made available to various
segments such as agriculture, industry, etc. This helps in increasing capital formation.
3. Provision of Investment Avenue: Capital market raises resources for longer periods of
time. Thus it provides an investment avenue for people who wish to invest resources for
a long period of time. It provides suitable interest rate returns also to investors. Instruments
such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides
diverse investment avenue for the public.
4. Speed up Economic Growth and Development: Capital market enhances production and
productivity in the national economy. As it makes funds available for long period of time,
the financial requirements of business houses are met by the capital market. It helps in
research and development. This helps in, increasing production and productivity in
economy by generation of employment and development of infrastructure.
5. Proper Regulation of Funds: Capital markets not only helps in fund mobilization, but it
also helps in proper allocation of these resources. It can have regulation over the resources
so that it can direct funds in a qualitative manner.

6. Service Provision: As an important financial set up capital market provides various types
of services. It includes long term and medium term loans to industry, underwriting services,
consultancy services, export finance, etc. These services help the manufacturing sector in a
large spectrum.
7. Continuous Availability of Funds: Capital market is place where the investment avenue
is continuously available for long term investment. This is a liquid market as it makes
fund available on continues basis. Both buyers and seller can easily buy and sell securities
as they are continuously available. Basically capital market transactions are related to the
stock exchanges. Thus marketability in the capital market becomes easy.

Self Assessment

Fill in the blanks:
1. Capital market is the market for ……………….. finance, concerned with funneling long-
term funds from Surplus Spending Units (SSUs) to Deficit Spending Units (DSUs).

2. ………………….are companies that raise funds from domestic and foreign sources, both
public and private. The following sources help companies raise funds.
3. Fund Providers can be categorized as domestic and …………………. investors, institutional
and retail investors.

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