Linkages of Indian Interest Rates with US and Japanese Rates

Abstract

The reform process in India has gradually integrated the Indian financial markets with the rest of the world, and as a corollary, interest rates in India have been responding to movements in other financial markets. This article employs monthly short-term interest rate data over the 1992-2002 period to investigate the influence that the Japanese and the American interests exert on interest rates in India. We use cointegration and causality tests and find the existence of a steady-state relationship of short-term interest rates in India with both US and Japan. We also briefly discuss some policy fallouts.

Keywords: interest rates linkages, cointegration, financial integration, error correction models, India

JEL Classification: F36