Page 46 - IILMGSM Journal_Management Perspective
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ationship among themselves. Similar result was macroeconomic developments such as medium-term
true for the rates in the credit market. G Sec market inflation outlook and real sector developments in the
was integrated with both the credit and the money private sector.
market. The capital market was not found to be
integrated with other segments whereas the foreign A different methodology was used by Brouwer
exchange market was found to be integrated with the (1995) for examining the domestic financial market
domestic money market to a great extent. It was also integration in the Western Pacific economies for the
established (using partial adjustment model) that the period 1975 to 1994 (divided into four sub periods)
speed of adjustment is not very high. In the recent by looking at the relationship between the money
study by RBI (2007) using VAR it was found that market interest rates and the institutional interest
the 91 day treasury bills rate is influenced by the 10 rates (bank deposit and lending rates). A pricing
year government securities yield and commercial model was developed to derive the deposit and
paper rate. Secondly, short-term liquidity impact on lending rates in all the economies. It was observed
the inter-bank call money rate is mainly influenced that the correlations tend to be higher, the adjustment
by foreign exchange market developments and fiscal process simpler, and the adjustment to equilibrium
policy induced effect at the short-end of the market faster in deposit markets than in loan markets because
through changes in the benchmark 91-day Treasury the substitutability is greater for the deposits than
Bills rate. Third, forward exchange premier is driven loans as there is additional contracting costs and
by arbitrage condition, with the inter-bank call informational asymmetries in the loan market. This
money market being the key driver, though some paper examines the integration among the various
modest impact was due to developments in the segments of the financial market in India and how it
private sector (commercial paper) and long-term has changed over time. The financial market can be
fundamentals (10-year government bond yield). divided into six segments namely – credit market,
Fourth, the commercial paper is driven by long-term money market, capital market, foreign exchange
government securities yield in the medium to longer market, government security market and the
term horizon, while liquidity, risk premium and corporate debt market. Since the corporate debt
foreign exchange market condition have modest market in India is still in a nascent stage and
impact in the short-run. Fifth, the commercial paper representative data is not readily available, therefore,
representing developments in productive activities it is not included in the analysis.
and credit requirements by the private sector has a
substantially larger impact than liquidity, foreign Data and Methodology
exchange market and risk premium. Moreover, an
extension of the above multivariate vector auto The study is conducted over the time period starting
regression (VAR) model to a structural representation January 1994 and ending December 2008. The
reveals that financial market integration in the financial reforms were introduced in 1991. Initial
medium to longer term horizon is induced by the three years of the reform period are excluded so as
long-term yield on government securities and the to let the reforms show effect. The total period is
commercial paper rate, attributable to divided into three sub periods January 1994 – May
2000, June 2000 to December 2004 and January
(45)
true for the rates in the credit market. G Sec market inflation outlook and real sector developments in the
was integrated with both the credit and the money private sector.
market. The capital market was not found to be
integrated with other segments whereas the foreign A different methodology was used by Brouwer
exchange market was found to be integrated with the (1995) for examining the domestic financial market
domestic money market to a great extent. It was also integration in the Western Pacific economies for the
established (using partial adjustment model) that the period 1975 to 1994 (divided into four sub periods)
speed of adjustment is not very high. In the recent by looking at the relationship between the money
study by RBI (2007) using VAR it was found that market interest rates and the institutional interest
the 91 day treasury bills rate is influenced by the 10 rates (bank deposit and lending rates). A pricing
year government securities yield and commercial model was developed to derive the deposit and
paper rate. Secondly, short-term liquidity impact on lending rates in all the economies. It was observed
the inter-bank call money rate is mainly influenced that the correlations tend to be higher, the adjustment
by foreign exchange market developments and fiscal process simpler, and the adjustment to equilibrium
policy induced effect at the short-end of the market faster in deposit markets than in loan markets because
through changes in the benchmark 91-day Treasury the substitutability is greater for the deposits than
Bills rate. Third, forward exchange premier is driven loans as there is additional contracting costs and
by arbitrage condition, with the inter-bank call informational asymmetries in the loan market. This
money market being the key driver, though some paper examines the integration among the various
modest impact was due to developments in the segments of the financial market in India and how it
private sector (commercial paper) and long-term has changed over time. The financial market can be
fundamentals (10-year government bond yield). divided into six segments namely – credit market,
Fourth, the commercial paper is driven by long-term money market, capital market, foreign exchange
government securities yield in the medium to longer market, government security market and the
term horizon, while liquidity, risk premium and corporate debt market. Since the corporate debt
foreign exchange market condition have modest market in India is still in a nascent stage and
impact in the short-run. Fifth, the commercial paper representative data is not readily available, therefore,
representing developments in productive activities it is not included in the analysis.
and credit requirements by the private sector has a
substantially larger impact than liquidity, foreign Data and Methodology
exchange market and risk premium. Moreover, an
extension of the above multivariate vector auto The study is conducted over the time period starting
regression (VAR) model to a structural representation January 1994 and ending December 2008. The
reveals that financial market integration in the financial reforms were introduced in 1991. Initial
medium to longer term horizon is induced by the three years of the reform period are excluded so as
long-term yield on government securities and the to let the reforms show effect. The total period is
commercial paper rate, attributable to divided into three sub periods January 1994 – May
2000, June 2000 to December 2004 and January
(45)
