The IUP Journal of Applied Economics
Financial Integration Within and Across the Markets: Evidence from India

Article Details
Pub. Date : Oct, 2021
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE21021
Author Name : Ajay Prasad Adepu, Nagaraju Thota and Niranjan Swain
Availability : YES
Subject/Domain : Economics
Download Format : PDF Format
No. of Pages : 20



Using monthly data on money, short-term credit, foreign exchange, government securities, long-term debt, futures, and real estate market instruments' returns, the paper examines the financial-markets' integration (i.e., long-term relationship or cointegration) within and across the markets in India for the sample period April 2006 to March 2020 by employing the autoregressive distributed lag methodology. In terms of within the markets, the study found that there exists financial integration only in money, short-term, government and forex markets. On the other hand, in terms of across the markets, it is found that all the money market and short-term credit market instruments other than IMF lending rate and bank rate are cointegrated with government securities, long-term debt, futures, foreign exchange and real estate markets. Equity market is cointegrated only with money, short-term credit and futures markets. Similarly, 10-year government security is cointegrated with money, short-term credit and forex markets. The equity futures market is cointegrated with money, short-term credit and long-term debt markets only, while the corporate bond market is cointegrated with all the markets other than futures. On the other hand, neither the commodity futures market nor the real-estate market is cointegrated with any other markets. The equilibrium adjustment speed is not uniform across the markets and in general it is lower within the markets compared to across the markets.


With an aim to facilitate free and safe movement of the (huge amount of) capital within and across the markets at domestic level as well as international level, the Government of India (GoI) has gradually been deregulating and liberalizing the various financial markets since 1991.1 Since then the Indian financial markets have opened the doors for the Indian investors [i.e., households, financial institutions and governments (state and central or federal)] to invest in the domestic as well as in the international financial markets and have also allowed the foreign investors [(i.e., foreign households, financial institutions, governments and other multilateral financial institutions such as, World Bank, IMF, etc.)] to invest in Indian financial markets. This has led to a regime change in the Indian financial system not only in terms of the capital movements, technological innovations, market efficiency and competition, but also in terms of financial integration.