Interdependence of financial markets in India: Empirical evidence

Abstract

The present study is used to examine the interdependence of financial markets in India.Efficient financial systems are indispensable for speedy economic development. The financial system of a country is a conglomeration of sub market, viz. Capital, Commodity, Forex and Government Securities market. The flow of funds in these markets is multi directional depending upon liquidity, risk profile, yield pattern, interest rate differential or arbitrage opportunities, regulatory restrictions etc. This study considers daily data encircling the closing stock price index of NSE (NIFTY 50), Gold price (Rs.), Exchange rates ($) and Treasury bill rate. The study is based enormously on secondary data acquired from RBI database, NSE database and World Gold Council database for the period from January 3, 2005 to December 31, 2015. For this purpose, this paper seeks to examine in this context whether there is impact between of NSE (NIFTY 50), Gold price (Rs.), Exchange rates ($) and Treasury bill rate with the help of tools like Unit root Test, Correlation, Descriptive Statistics, Multiple regression Test and Granger causality Test. It is found that there is positive correlation between Gold price and US dollar and also between US dollar and Treasury bill. Empirical results provide the support of feedback causality between Exchange rate (US dollar) and Nifty50 and also Nifty50 Granger causes US dollar in India. Although there is unidirectional Granger cause between Nifty50 and Treasury bill rate, the study does not show any Granger cause betweenTreasury bill rateand Nifty 50. As the Government securities market in India is still in the developing stage, it was not found to be integrated with the domestic market.Indians have started considering gold not only as jewellery but also an important mode of investment like investment in bonds and equities.