This study seeks to examine the factors responsible for the lack of international financial integration in India using the covered interest parity condition. The study reveals that the international oil price, Real Effective Exchange Rate (REER), interest rate differential and current account openness are the most important variables affecting the forward premium in India. In an era of financial globalization, it is the current account-related and trade-related factors which have a greater impact on the forward premium than the capital account-related factors.

Financial integration and openness are often used interchangeably. It is, however, important to distinguish between the two. Financial openness relates to the removal of restrictions on international capital movements. These restrictions may be market-based or administrative. It can also include reduction of discriminatory measures against foreign financial institutions operating in domestic markets. The definition of financial openness can be extended to include the introduction of measures to attract foreign capital. Therefore, financial openness is synonymous with capital account liberalization.

Financial integration is achieved when domestic financial markets become part of the world market thus synchronizing interest rate movements, savings and investment activities and the accumulation of physical capital stocks. There will then be free movement of capital across countries whenever interest rate differential emerges, because the marginal product of capital will be different, thus implying an arbitrage opportunity. This movement of capital ensures the availability of capital in economies where the domestic savings are not adequate for domestic investments.

Applied Finance Journal, International Financial Integration, International Capital Movements, Domestic Markets, Financial Integration, Financial Markets, Domestic Investments, Globalization, International Monetary Fund, IMF, Financial Openness, Foreign Exchange Market, Monetary Policy, Money Markets, Foreign Institutional Investments, FIIs, Indian Government Securities, Debt Corporate Market, Gross Domestic Product, GDP.