Page 45 - IILMGSM Journal_Management Perspective
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ket within an economy especially in an emerging In order to achieve integration it is imperative to have
market like India. The will to develop and contribute wide range of instruments and advanced technology.
to the existing literature is the motivation behind this Different kinds of instruments are needed in all the
study. It is an important aspect of integration as it is segments that suit the needs of different kind of
considered as a pre requisite for international investors so as to increase the depth of the markets.
financial integration [Brouwer (1995)]. It is very In the process the investors benefit as they have
crucial for the overall health and stability of the better option for portfolio diversification. The
financial system of an economy. The domestic market advanced technology is required to simplify and
can be broadly divided into six segments - money speed up the process of trading and settlement.
market, credit market, government securities market,
corporate debt market, foreign exchange market and One of the main objectives of the financial sector
equity market. reforms that were initiated in 1991 was to enhance
the integration among the segments of the financial
There are various benefits of having an integrated market [Reddy (1999)]. Steps directed towards
financial system at the domestic level. The most achieving this objective were taken. Broadly it
important benefit is that it facilitates effective included free pricing, widening of participation base
transmission of the monetary policy impulses in markets, introduction of new instruments and
[Petursson (2001) and Bhoi and Dhal (1998)]. If the improvements in payment and settlement
central bank is able to take effective monetary policy infrastructure (RBI 2007).
decisions at the right time and they are quickly
transmitted as a result of the integration of the market The literature in the area of domestic financial market
segments, it will lead to financial as well economic integration is sparse especially in India. Bhoi and
stability. Dal (1998) did an in depth analysis of the inter
linkages of the various segments of the financial
In the integrated markets the information is rapidly markets over the period 1993 – 1998. It was followed
transmitted from one segment to the other enhancing by RBI’s various reports.
the efficiency of the markets and reducing the
arbitrage opportunities. Integrated and efficient Co movement of interest rates was found in the
markets provide an environment which motivates money, credit and the G Sec market. Secondly, the
savers to invest in these markets resulting in better equity market was found to be having relatively low
mobilization of saving. The increased investment if and negative correlation with the interest rates reason
directed in productive assets can lead to accelerated being the existence of different participants in these
rate of economic growth. Domestic market segments. [Bhoi and Dhal (1998), RBI (2001) and
integration strengthens the financial system as a RBI (2007)]. RBI (2001) reported that while the
whole and makes it mature enough to reap the short term interest rates respond quickly and
benefits of international financial integration and pronouncedly to the changes in monetary policy rate,
minimizing the costs of the same. If the markets are long term rates exhibit somewhat sticky behavior.
not mature enough and financial openness is adopted
it can result into a crisis situation similar to the South The co integration analysis by Bhoi and Dhal (1998)
East Asian crisis. revealed that the money market variables (Call
money rate, commercial paper rate and commercial
deposit rate) were having long run equilibrium
(44)
market like India. The will to develop and contribute wide range of instruments and advanced technology.
to the existing literature is the motivation behind this Different kinds of instruments are needed in all the
study. It is an important aspect of integration as it is segments that suit the needs of different kind of
considered as a pre requisite for international investors so as to increase the depth of the markets.
financial integration [Brouwer (1995)]. It is very In the process the investors benefit as they have
crucial for the overall health and stability of the better option for portfolio diversification. The
financial system of an economy. The domestic market advanced technology is required to simplify and
can be broadly divided into six segments - money speed up the process of trading and settlement.
market, credit market, government securities market,
corporate debt market, foreign exchange market and One of the main objectives of the financial sector
equity market. reforms that were initiated in 1991 was to enhance
the integration among the segments of the financial
There are various benefits of having an integrated market [Reddy (1999)]. Steps directed towards
financial system at the domestic level. The most achieving this objective were taken. Broadly it
important benefit is that it facilitates effective included free pricing, widening of participation base
transmission of the monetary policy impulses in markets, introduction of new instruments and
[Petursson (2001) and Bhoi and Dhal (1998)]. If the improvements in payment and settlement
central bank is able to take effective monetary policy infrastructure (RBI 2007).
decisions at the right time and they are quickly
transmitted as a result of the integration of the market The literature in the area of domestic financial market
segments, it will lead to financial as well economic integration is sparse especially in India. Bhoi and
stability. Dal (1998) did an in depth analysis of the inter
linkages of the various segments of the financial
In the integrated markets the information is rapidly markets over the period 1993 – 1998. It was followed
transmitted from one segment to the other enhancing by RBI’s various reports.
the efficiency of the markets and reducing the
arbitrage opportunities. Integrated and efficient Co movement of interest rates was found in the
markets provide an environment which motivates money, credit and the G Sec market. Secondly, the
savers to invest in these markets resulting in better equity market was found to be having relatively low
mobilization of saving. The increased investment if and negative correlation with the interest rates reason
directed in productive assets can lead to accelerated being the existence of different participants in these
rate of economic growth. Domestic market segments. [Bhoi and Dhal (1998), RBI (2001) and
integration strengthens the financial system as a RBI (2007)]. RBI (2001) reported that while the
whole and makes it mature enough to reap the short term interest rates respond quickly and
benefits of international financial integration and pronouncedly to the changes in monetary policy rate,
minimizing the costs of the same. If the markets are long term rates exhibit somewhat sticky behavior.
not mature enough and financial openness is adopted
it can result into a crisis situation similar to the South The co integration analysis by Bhoi and Dhal (1998)
East Asian crisis. revealed that the money market variables (Call
money rate, commercial paper rate and commercial
deposit rate) were having long run equilibrium
(44)
