Who are Regulators?
The efficient provision of infrastructure services is the responsibility of economic regulators. Most regulators of the financial market are not actively involved in the precise judgement that takes place in each phase of the infrastructure lifespan when competition alone is unable to produce this result. Instead, they aim to shape the operator's actions as it oversees the lifetime management of the system.
Economic regulators, for instance, limit tariffs to reasonable levels to avoid the exertion of market power. This restricts the budget available to the operator for administering the system, but it has no bearing on how the operator uses that budget for the same. Economic regulators also give operators cash incentives to work toward goals like raising service standards.
What is Financial Regulation?
Financial regulation is the umbrella term for the laws and regulations that businesses in the financial sector, including banks, community banks, insurance companies, stock brokers, and investment firms, must abide by. Financial regulation, however, involves more than just putting regulations in place; it also involves constant monitoring and enforcement of these standards.
We are all reliant on the financial system in some way. Financial firms that are not adequately regulated run the risk of jeopardising monetary stability, harming consumers, and jeopardising the outlook of the economy. Solid economic regulation is necessary to prevent problems from occurring, protect customers in the event that they do, and preserve the larger financial system.
Kinds of Regulators in India
The share, credit, and derivatives exchanges in India are all subject to regulation, oversight, and policy formulation by the Indian Capital Markets, which is also in charge of safeguarding investor interests.
Securities & Exchange Board of India (SEBI)
It is the main agency for stock exchanges in India and was founded under the SEBI Act of 1992. Whether internal or external, SEBI laws apply to all financial intermediaries who have been given permission by their individual regulators to operate in the Indian securities markets. SEBI, who regulates the money market, was created to keep up with the growing demand for limiting hazardous activities in the quickly growing securities industry and to safeguard investors' interests. The following are SEBI's main responsibilities:
Protective Functions
It plays the role of stock market regulators.
It looks for price manipulation.
It makes insider trading illegal.
It forbids unfair and dishonest business practises.
Development Functions
SEBI supports the education of securities market middlemen.
SEBI has a versatile and adaptable strategy to encourage stock exchange activity.
Regulatory Functions
For the purpose of regulating intermediaries, including merchant bankers, brokers, underwriters, and others, SEBI has established rules, regulations, and a conduct code.
SEBI regulates and controls how mutual funds, among other things, operate.
SEBI investigates and inspects stock exchanges.
Reserve Bank of India (RBI)
The Reserve Bank of India Act, 1934 governs it. The nation's central bank is the Reserve Bank of India. It serves as the Indian financial state's nerve centre. It oversees all organisations involved in allocating capital and saving. The two main categories of entities that are under RBI supervision are commercial banks and non-banking financial institutions (NBFC).
Monetary Authority - Creates, directs, and implements monetary policy to keep prices stable while keeping the goal of growth in mind.
Regulator and Supervisor of the Financial System - Defines the conditions under which India's banking and financial sector must operate. It also safeguards depositors' interests, keeps public confidence in the banking system, and offers everyone affordable banking services.
Foreign Exchange Manager - The Foreign Exchange Management Act of 1999 is overseen by RBI to facilitate international trade and payments while assisting the foreign exchange market's orderly expansion and sustainability in India.
Issuer of Currency - Issues, trades, and destroys coins that can't be used in commerce. To ensure that the public has an adequate supply of coins and cash in good condition.
Regulator and Supervisor of Payment And Settlement Systems - Introduces and improves secure and effective payment solutions throughout the nation to meet people's needs. Maintain public confidence in the payment and settlement process.
Functions of Regulators
Economic Expansion: In addition to reflecting economic health, the capital market also promotes it. It transfers resources from those who have excess capital to others who have not. As a result, the nation experiences equitable economic growth.
Encourage Individuals to Save More: As capital markets have grown, banking institutions have been able to offer facilities and provisions that will assist people to save more. Due to the lack of a capital market, individuals may have instead invested in gold or real estate.
Stock Price Stabilisation: Capital Market authorities have curbed speculative activity and also given borrowers money at the least potential interest rates. This made it easier to prevent fluctuations in stock values.
Proper Fund Redistribution: The capital market is a crucial platform for directing people's idle resources towards an economy's productive sectors. It invests idle money in wise ways.
Capital Formation: It is assisted by the capital market, which increases the amount of capital already present in the economy. This facilitates the growth of capital in the economy.
Conclusion
Regulators of the financial market play a significant role in our lives as a result of the fact that we are all dependent on the financial system in some way. Savings customers, for instance, depend on banks to keep their money on hand when they need it. To operate and grow, organisations must be able to borrow money. Consumers may require guidance on the appropriate option for them while obtaining a mortgage or insurance. Enrollees of insurance firms depend on their ability to file claims and receive compensation when some problem occurs.
FAQs on Regulators of the Money Market Identified
1. Who are the primary regulators of the money market in India?
The money market in India is predominantly regulated by the Reserve Bank of India (RBI). While the RBI is the principal regulator, other bodies also play a role under its supervision. These include the Securities and Exchange Board of India (SEBI) for specific instruments and specialized institutions like the Discount and Finance House of India (DFHI) and the Securities Trading Corporation of India (STCI), which help improve liquidity and develop the market.
2. Is the money market regulated by RBI or SEBI?
The money market is primarily regulated by the Reserve Bank of India (RBI). SEBI's main role is to regulate the capital market, which deals with long-term funds like stocks and bonds. The RBI focuses on the money market because it involves short-term borrowing and lending, which is crucial for managing the country's monetary policy and overall liquidity in the banking system.
3. What is the legal framework that empowers the regulation of India's money market?
The regulation of India's money market is supported by a robust legal framework. The two most important acts are:
- The Reserve Bank of India Act, 1934: This act establishes the RBI as the central bank and gives it the power to regulate the banking system, control credit, and issue currency, all of which are fundamental to managing the money market.
- The Banking Regulation Act, 1949: This act provides the RBI with direct powers to regulate and supervise commercial banks, which are the biggest players in the money market.
4. Why is the Reserve Bank of India (RBI) the main regulator of the money market and not SEBI?
The RBI is the primary regulator of the money market because the market's core function aligns with the RBI's main objectives: managing the country's short-term liquidity and implementing monetary policy. The money market deals with instruments that have a maturity of up to one year, directly impacting interest rates and cash flow in the economy. In contrast, SEBI regulates the capital market, which focuses on long-term capital formation through stocks and bonds, and its primary objective is investor protection and market development.
5. How do the roles of money market regulators and capital market regulators differ in India?
The roles of the regulators differ based on the market they oversee. The RBI (money market regulator) focuses on ensuring stability and liquidity in the short-term credit market to manage the nation's monetary policy. Its goal is economic stability. On the other hand, SEBI (capital market regulator) focuses on protecting investors, preventing fraudulent practices, and promoting the development of the market for long-term funds. Its goal is investor protection and capital formation.
6. What is the importance of having regulators for the money market?
Regulators are crucial for the money market to ensure financial stability and protect the integrity of the financial system. Their importance lies in:
- Controlling Inflation: By managing the money supply through money market operations, the RBI can control inflation.
- Maintaining Liquidity: They ensure that banks have sufficient short-term funds to meet their obligations, preventing financial crises.
- Ensuring Confidence: A regulated market builds confidence among participants, encouraging them to lend and borrow, which keeps the economic engine running smoothly.
7. How do the actions of money market regulators impact the daily economy?
The actions of money market regulators like the RBI have a direct impact on the daily economy. When the RBI adjusts policy rates like the Repo Rate, it immediately affects the borrowing costs for commercial banks. This change is then passed on to consumers and businesses in the form of higher or lower interest rates on loans and savings accounts. This influences everything from business investment and expansion to the EMIs an individual pays for a loan.
