Long term finance for corporate and government: The capital market is the market for securities, where companies and governments can raise long term funds. Selling stock and selling bonds are two ways to generate capital and long term funds. It provides a new avenue to corporate and government to raise funds for long term. Helps to bridge investment – savings gap: Capital market expand the investment options available in the country, which attracts portfolio investments from abroad. Domestic savings are also facilitated by the availability of additional investment options. This enables to bridge the gap between investment and savings and paves the way for economic development. Cost – effective mode of raising finance : Capital market in any country provides the corporate and government to raise long term finance at a low cost as compared to other modes of raising finance Therefore capital market is important, more so for India as it embarks on the path of becoming a developed country.
Provides an avenue for investors to park their surplus funds: Capital market provides the investors both domestic as well as foreign, various instruments to invest their surplus funds. Not only it provides an avenue to park surplus funds but it also helps the investors to reap decent rewards on their investment. This realization has resulted in increased investments in capital market both from domestic as well as foreign investors in Indian capital market.
Conducive to implementation of Monetary Policy: since RBI controls the movement and availability of money in the economy. When RBI follows the expansionary policy it purchases government securities from the bond market and sells the same in the in the secondary market. This process has some effect on the interest rates. Thus capital market helps RBI in applying the monetary policy. Indicates the state of the economy: Capital market is said to be the face of the economy. This is so because when capital market is stable, investments flow into capital market from within as well as outside the country, which indicates that the future prospects of the economy are good.