Money Market Integration in India: A Time Series Study

Indian financial markets have come a long way from the highly controlled pre-liberalization era. Today, their focus is on achieving efficiency, which is the hallmark of any developed financial market. This paper tests the efficiency and extent of integration between financial markets empirically at the short end of the market. The rates, mainly taken for the purpose of this study, comprise the call market rate, CD (Certificate of Deposit) rate, CP (Commercial Paper) rate, 91-day T-bill (Treasury bill) rate and 3-month forward premium. The results, though promising, are mixed. Therefore although markets have achieved integration in some pockets, they have still to achieve full integration. This has veritable implications on the monetary policy of the Reserve Bank of India (RBI) since changes in one market (gilt market) can be used to regulate the other market (forex market). This would give an additional tool to RBI, rather than resorting to direct intervention, which is the sign of a weak financial system.