Topic: Capital Markets & Money Markets
Q5. “Deepening capital markets is essential for sustainable economic growth, but it also amplifies systemic risks.” Discuss the role of capital markets in economic development. Examine the risks associated with excessive financialization. (10 M)
Difficulty Level: Medium
Reference: InsightsIAS
Why the question
Capital market deepening and rising financialization have become central to India’s growth trajectory amid increasing retail participation and global capital flows.Key Demand of the question
The question requires examining how capital markets contribute to economic development through multiple channels. It also demands analysing the systemic risks emerging from excessive financialization in line with the given statement.Structure of the Answer:
Introduction
Briefly highlight the dual role of capital markets as growth enablers and potential sources of instability.Body
- Role of capital markets in development: Indicate points like efficient allocation of capital, mobilisation of long-term savings, support to innovation and diversification of financing sources.
- Risks of excessive financialisation: Indicate points like asset bubbles, volatility due to capital flows, disconnect from real economy and systemic contagion risks.
Conclusion
Provide a balanced forward-looking line emphasising regulated and inclusive financial deepening.
