Has the Indian Finance Market Achieved Efficiency?

Abstract

Efficient financial market is one in which prices always fully reflect available information. The most common type of efficiency referred to in financial markets is the allocative efficiency. A trait of allocative efficient financial market is that it channels funds from the ultimate lenders to the ultimate borrowers in a way that the funds are used in the most socially useful manner. Eugene Fama created efficient –market hypothesis. Financial markets are efficient if current prices fully reflect all currently available relevantinformation. If financial markets are efficient, then there is no “best time’ to purchase an asset. Apparent past price patterns are not predictive for future prices. If financial markets are efficient, asset price changes are serially random.This paper is concerned with operational efficiency rather than allocative efficiency. The financial sector reforms which were initiated in early 90s were intended to bring about operational efficiency in the financial market in the sense that the prevailing interest rates in different segments of finance market are moving in the same direction so that possibility of arbitrage is eliminated. Strengthening of linkages among money market segments suggests greater operational efficiency of markets as well as conduct of monetary policy. Purpose of the paper is to explain the impact of financial sector reform measures on integration of various segments of financial markets in India. The present study found integration of short term rates- money credit and gilt edged markets-but capital market deviated from the integration path. Reserve Bank of India studied in detail the process of liberalization of financial and money market and also domestic financial with international financial market. This paper analyzed the long run association between different Money market rates, Debt market, Capital market rates and Forex market rates to highlight the integration between them. The study found there is integration between certain segments of finance market in India .Increased policy changes would expedite the process of financial market integration and will help in the elimination of arbitrage avenues and thereby making the finance markets more efficient.

Keywords: Market efficiency, financial market integration, cointegration, Indian finance market, Granger causality