The stock market in India has witnessed a rapid growth, led by reforms, since the early 1990s and the surge in foreign portfolio capital flows. This study investigates as to how the Indian stock market is integrated with global markets of the US, the UK and Japan and major regional markets in Asia such as Singapore and Hong Kong. The study uses the popular multivariate cointegration model to gauge the integration process. Empirical findings support that a single cointegration relation bounds these stock markets. Moreover, cointegration of the Indian stock market with the global and regional markets holds for stock prices measured in US dollar rather than local currency, attributable to the role of international portfolio investors and capital flows. There is evidence that India's international integration has strengthened in the recent period beginning 2003. However, the integration of India's stock market with the global markets, such as the US and the UK, is much higher than with the regional markets. Global and regional markets together could account for the bulk of the total variation in India's stock market. The Indian stock market provides opportunity for higher return than global and regional markets, reflecting strong fundamentals and long-horizon investment opportunities in the recent period. From a policy perspective, the findings of the study would prove useful in terms of crucial information inputs for monitoring financial integration and developing the markets further.

Stock markets of Emerging Market Economies (EMEs) have emerged as the major channel for integration with global and regional markets, led by globalization, deregulation and advances in information technology. Growing financial integration of the EMEs has been fostered by the rapid increase in the cross-border mobility of private capital inflows due to investors seeking portfolio diversification and better yield, growing reliance of nations on the savings of other nations, and shift in the leverage preference of companies from debt to equity finance. There exists a generalized perspective on the association of financial integration with several benefits, including development of markets and institutions and effective price discovery leading to higher savings, investment and economic progress (Mohan, 2006). At the same time, linkages among financial markets can pose various risks such as the contagion and the associated disruption to economic activities, which were evident during the crisis in Asia in the late 1990s. More recently, in January 2008, national stock markets declined sharply in the wake of credit market developments in the US. Economists have, thus, realized that it is useful for countries to monitor the progress of financial markets' interdependence for better policy-making.

Recognizing the critical importance of the subject, numerous studies in the applied financial literature have engaged in measuring international integration of national stock markets across several developed and emerging market economies. In the copious literature, however, studies that focused on India's stock market are rather scarce, despite various stylized facts suggesting, prima facie, the growing linkage of the Indian market with global and major regional markets in Asia during the reform period, beginning in the early 1990s. Illustratively, the Bombay Stock Exchange (BSE) of India has emerged as the largest stock exchange in the world in terms of the number of listed companies, comprising several large, medium and small firms. With a market capitalization of $1.8 tn in 2007, the BSE has become the 10^th largest stock exchange globally and come closer to advanced economies in terms of the ratio of market capitalization to Gross Domestic Product (GDP). In terms of transaction cost, the Indian stock market compares with some of the developed and regional economies. With the objective of internationalizing, several Indian companies have opted for listing on the stock exchanges of other countries, especially global markets of the US and the UK. Ten major Indian companies listed on the New York Stock Exchange account for 19% weight in the benchmark 30-scrip stock price index of the BSE. There are also some Indian companies currently listed on the London Stock Exchange. Foreign capital flows have made a crucial contribution to the growth of India's stock market. India has become a major destination, accounting for about a fourth of total portfolio capital inflows to the EMEs group. There are 1,247 foreign institutional investors participating in India's stock market. The purchase and sales activities of such investors account for three-fourths of the average daily turnover of India's stock market.

Applied Finance Journal, Indian Stock Market, Global Markets, Emerging Market Economies, Multivariate Cointegration Model, Globalization, Information Technology, Private Capital Inflows, Financial Integration, Financial Markets, Credit Market Developments, Gross Domestic Product, GDP, Vector Error Correction Model, VECM.