The Indian financial system, till the early 90`s, was a closed system with its main  characteristics  - an administered structure of restrictive acts, interest rates, restrictions on all market participants--including banks, FI (Financial Institutions) & corporate –by the way of limits on the amount / volume and nature of the transactions they can undertake. Also they had to get prior approval before taking any actions. Some industries were limited to the control of public sector only.

Even public private partnership was not allowed in most of the sectors like railways, imposts of some articles. Moreover even the FOREX markets were fully controlled with a very few opportunities , limits on the transactions between residents and non-residents were also there. The bank rates & interest rates in the securities those issued by government as well as private bodies were controlled in some or the other way and predetermined. Moreover, the credit advanced to the industry players was also very much regulated and varied a lot in cost. Interest rates for some sectors were very high whereas subsidy was provided to sectors like agriculture etc. The overall economic and monetary system was very weak with fiscal deficit circles emerging year on year

After 1991 the economic reforms took place and emphasis was laid down on decontrolling of the financial sector and markets. FOREX policies were liberalised; FERA and MTRP restrictions were also reduced. Overall steps were taken to open the economy by making imports simpler and promoting exports. A wide arena of sectors was made open for private sector to participate and develop the industry. The government and regulatory bodies laid down the short term objective of creating liquidity and providing incentives to promote immediate financial injection in the dead system.

Whereas the long term objective remained moreover the same to create a global , efficient and sustainable economic system with overall prosperity. For the short term objective instruments like Certificates of Deposits (CD’s) and Commercial Papers (CP`s) were introduced which infused the liquidity into the system. Money markets started determining the interest rates prevailing in the markets. The bond rate was market determined by the forces of demand and supply. The reserve bank of India (RBI) had more instruments to control the liquidity like CRR (Cass Reserve Ratio), SLR ( Statutory Liquidity Ratio) ,RBI Bonds ,Repo and Reverse Repo rate. Along with all these steps FDI was also allowed which gave a great infusion of money into the economy.

For more details please visit here www.bullrider.in