How integrated are India’s Financial Markets

This is easily one of the best reports so far on India’s Financial Markets. I have summarised 2 chapters so far, G-Sec markets and Equity and Corporate Debt Markets.

In continuation, I just went through this chapter on Financial Market Integration. It is another very good read for those interested in financial markets. 

Firstly what do we mean by integration here? In short, basically we have various types of financial markets, equity, G-Sec, MoneyMarkets etc which with a different function and different instruments and you integrate them. Another kind of integration is between domestic and global markets.

But why do you need to integrate? Well, with more integration you can transmit price signals more efficiently, reduce arbitrage opportunities, achieve higher level of efficiency in market operation of intermediaries and increase efficacy of monetary policy in the economy.

The chapter discusses the theories of integration, how does one measure finacial integration, benefits and risks in a pretty detailed and interesting manner.

I wouldn’t go into theory etc. and just discuss some findings:

Integration between different domestic markets:

  • The integration (as measure by correlation) amongst various financial instruments traded in different markets has improved post 2000.
  • Only equity markets seem to have low correlation with other markets. Money markets, Bond Markets, Forex markets show improving correlation with time.
  • Besides this it also looks at various meaures like interest rate spreads between corp bonds and G-Secs and finds the difference is narrowing. The regression analysis says that spread between 5 year AAA corporate bond and G-Sec over 5 years comes to about 1.05%.
  • It also restresses the importance of a deep and well functioning G-Sec market which enables pricing of various financial instruments and helps in further integration.

Integration between domestic and international markets: 

  • There is a completely opposite picture when we compare Indian markets with its regional counterparts.
  • We see a healthy correlation between equity markets and poor correlation between money and bond markets
  • This suggests that latter markets remain segmented in the region whereas former have become more integrated as we have many cross-listings in other exchanges and stocks are traded elsewhere as well apart from national stock exchanges.

Overall, a pretty good analysis. It could have been better had the analysis got more empirical and try and measure integration in India using more sophisticated techniques it mentions in the report. I also mentioned these techniques in my previous entry where I covered a fantastic survey on Financial Globalization.

2 Responses to “How integrated are India’s Financial Markets”

  1. Indian Banking sector - a simple analysis « Mostly Economics Says:

    […] from RBI in my previous posts. I have commented some important findings from the report covering Financial Market Integration, G-Sec Markets and Equity and Corporate Debt […]

  2. garwin Says:

    For some reason the browser I got does not show that post accurately… It seems that a significant part of it is missing and the template of this post doesn’t appear to be right. Can you confirm that this article has been tested with Opera?

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