Jecheche Petros (2011) examined “the effect of stock exchange on
economic growth”. The objective of
his research is to find the relationship between economic growth and its
determinants with special focus on the stock market development in Zimbabwe
during the period from 1991 to 2007 . The key findings of this research are
that there is a positive relationship between efficient stock market and
economic growth both in short run and long run while financial instability and
inflation have negative effect, and human capital and foreign direct investment
have positive effect on growth. Researcher concludes that public and private
investment as complimentary and emphasizes on the role of government to improve
the financial sector efficiency of the economy. P.K.Mishra et.al.(2010) investigated the impact of capital
efficiency on economic growth in India by using the time series data on stock
market index, market capitalization from the period covering the first quarter
of 1991 to first quarter of 2010. The findings resulted into the fact that
capital market in India has the potential to contribute to the economic growth
of the country. The inference drawn from the research was that there exists a
linkage between capital market efficiency and economic growth in India and the
link is established through high rate of market capitalization and total market
turnover. Pallavi Sethi (
2013) suggested few of the innovative products that can be introduced in
the capital market which can lead to optimum utilization of resources and
concluded that innovation is the call of the Indian capital market but needs to
be applied cautiously.

I.
INTRODUCTION

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The financial system
of a country is often regarded as its backbone without which a country cannot
stand especially a country like India, which is regarded as one of the fastest
growing and developing economies of the world. Financial system of a country is
a combination of Financial institutions, Financial market, Financial
instruments and Financial services. In the aftermath of 2008 financial crisis
which shook the entire world, the Indian capital market was also affected, it became
incompetent to fulfill the needs the investors. The government took various
initiatives to uplift the capital market one of those is financial innovation
which is not a new term it has a long successful history with proven benefits.
It is an act of creating new financial instruments and then spreading it widely
new financial technologies into the markets. Financial Innovation has often
been regarded as a continuous and integral part in the growth of the capital
markets. Capital market being part of changing business dimensions across the
world are the first one to unleash the creativity leading to innovation. The
capital market is a place where long term funds can be raised by both government
and companies in order to trade securities in the bond and stock market. The
financial innovation has completely transformed the capital market with
introduction of new securities. In the modern economy the capital market is
being considered as an efficient financial intermediary and primary determinant
of the economic growth of the country. GDP refers
to the final value of goods and services produced within the geographic boundaries of a country during a
specified period of time, normally a year. The financial market functions in the direction
of providing strength to the economy by making finance available at the right
place. Inflation refers to a
situation of increase in the general price level over a period of time. It is a
part of business cycles. Every country experiences it during the process of its
growth and development. The declining trend of inflation in India is a clear
indication that the capital market is efficient enough to restore the
confidence of investors to make investment.