Emerging trends in financial markets integration: the Indian experience

Purpose – Financial sector reform measures, which were initiated in 1991, have provided some degree of maturity and integration of different segments of India's financial markets. The purpose of this paper is to articulate the impact of financial sector reform measures on integration of various segments of financial markets in India. Design/methodology/approach – The paper surveys various methodologies for measurement of financial integration and uses the recently developed technique of co‐integration in a VAR framework to assess the extent of integration of various segments of India's financial markets. Findings – The paper concludes that the financial market integration is inconclusive in India. Only a few segments of money market, Gilt market and foreign exchange market are integrated. Interest rate parity does not hold in India's case, which indicates poor evidence in support of international integration of domestic financial markets. Similarly, the analysis of the relationship between domestic saving and domestic investment does not support international integration. The study of co‐integration of Nasdaq and Bombay sensitive index (BSE), also revealed absence of international integration. Research limitations/implications – Owing to non‐availability of time series data, the paper could not consider the mutual fund market, pension market and various derivatives markets in the overall process of assessment of financial integration. However, the impact on the findings is minimal, as these markets are not so far developed in India. Practical implications – The findings have significant practical implications particularly in the formulation of policies on management and interventions in the money market, foreign exchange and equity markets and in the overall formulation of monetary policy for the economy. Originality/value – This paper presents a quite comprehensive research study on financial integration in India and is original, particularly in the area of application of the co‐integration technique for assessment of financial integration.