JOURNAL OF MANAGEMENT (JOM) Journal of Management (JOM) ISSN 2347-3940 (Print), ISSN 2347 3959 (Online), Volume 1, Issue

e 1, July-December (2013) ISSN 2347-3940 (Print) ISSN 2347-3959 (Online) Volume 1, Issue 1, July-December (2013), pp. 54-60 IAEME IAEME: http://www.iaeme.com/jom.asp

JOM

AN ANALYTICAL STUDY OF INDIAN MONEY MARKETS AND EXAMINING THE IMPACT OF INFLATION
Prof. Deepa Chavan, Associate Professor, KG. Mittal Institute of Management, Mumbai, India. Dr.Makarand Upadhyaya Associate Professor in Marketing at College of Business Administration, Jazan University, Jazan, Saudi Arabia ABSTRACT Money Markets are the primary and major source of lending short term funds in the economy so as to maintain liquidity and stability of interest rates. The study is mainly aimed to analyse the effect of rising inflation rates on the Indian Money markets. To understand the impact of soaring prices of money market instruments the secondary data was collected from published sources and Regression technique was employed. Results from analysis reveal that growth in prices it has greatly affected the lending rates of short term financial instruments thus making borrowings costlier for the market participants and have suggested that government should take quick steps to combat with this rising inflation as it not only affects the money markets but also make it difficult for the country to achieve the sustainable economic growth. Keywords: Lending instruments, Inflation, Short-term funds, 91 day T Bill, Commercial Paper INTRODUCTION The money market is a key component of the financial system as it is the fulcrum of monetary operations conducted by the central bank in its pursuit of monetary policy objectives. It is a market for short-term funds with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money. The money market performs three broad functions. One, it provides an equilibrating mechanism for demand and supply of short-term funds. Two, it enables borrowers and lenders of short term funds to fulfill their borrowing and investment requirements at an efficient market clearing price. Three, it provides an avenue for central bank intervention in influencing both quantum and cost of liquidity in the financial system, thereby transmitting monetary policy impulses to the real economy. The objective of monetary management by the central bank is to align money market rates with the key policy rate. As excessive money market volatility could deliver confusing signals about the stance of monetary policy, it is critical to ensure
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Journal of Management (JOM) ISSN 2347-3940 (Print), ISSN 2347 3959 (Online), Volume 1, Issue 1, July-December (2013) orderly market behaviour, from the point of view of both monetary and financial stability. Thus, efficient functioning of the money market is important for the effectiveness of monetary policy. Varma (1997) have stated that the money market encompasses a wide range of instruments with maturities ranging from one day to a year, issued by the government and by banks and corporates of varying credit rating, and traded in markets of varying liquidity. The money market is also intimately linked with the foreign exchange market through the process of covered interest arbitrage in which the forward premium acts as a bridge between domestic and foreign interest rates. In the early nineties that interest rates were progressively deregulated in India, and there have therefore been few studies about the behaviour of interest rates in the country. Even today, the secondary market for long term debt is highly illiquid and underdeveloped. This makes it difficult to carry out an empirical study about long term interest rates. REVIEW OF LITERATURE Massimilianomarzo (2012) has investigated the relation between aggregate trading imbalances and interest rates in the Euro money market and have reported a strong evidence of a long-term linear relation between trading imbalances and liquidity prices for Euro interbank deposits. Augustine & Nam (2012), have investigated empirically the impact of exchange rate changes on the money demand of seven Asian countries. Estimates of the co integrating relations are obtained using different estimators and the error-correction technique was used to obtain the estimates of the short-run dynamics. The major results show that increases in the exchange rate, exert a significant positive effect upon money demand in both the long-run and the short-run in each of the seven countries. Further, domestic interest rates are found to have significant negative effect on the demand for money. These effects may result in significant reallocation of resources by monetary authorities and market participants. Fernandomierzejewski (2012) have studied the extent to which central banks are able to anticipate the effects of monetary policy can be assessed within the framework of the liquidity-preference proposition. An actuarial-based theory of liquidity preference is developed in this paper, which extends the traditional framework by introducing borrowing restrictions. A major result of the paper is that the interest rate elasticity of the money demand, and hence, the effectiveness of monetary policy, directly depends on the series of nominal output returns. Carren (2012), have examined and assessed the causes of inflation in the post-dollarized Zimbabwe. It employs time series econometric methodology based on monthly data to examine the probable factors influencing inflation in the post-dollarized Zimbabwe. The influence on inflation of factors such imports, consumer expectation about future inflation, exchange rate, interest rates, output growth and money supply, among others is investigated. The study however finds evidence that consumer expectations about future inflation, money supply, current exchange rate, and import value are the major factors influencing post-dollarization inflation. Varma (1997) have analysed analyses the structure and inter-relationships of money market interest rates and studies the extent to which covered interest parity holds in India. The paper shows that there was a major structural break in September 1995 when in the wake of turmoil in the foreign exchange markets, covered interest arbitrage came into play in a big way for the first time. Though the money market is free from interest rate ceilings, structural barriers and institutional factors continue to create distortions in the market. Apart from the overnight inter-bank (call market) rate, the other interest rates in the money market are sticky and appear to be set in customer markets rather
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Journal of Management (JOM) ISSN 2347-3940 (Print), ISSN 2347 3959 (Online), Volume 1, Issue 1, July-December (2013) than auction markets. A well defined yield curve does not therefore exist in the Indian money market RESEARCH METHODOLOGY Research Objective: The study is mainly aimed to analyse the effect of rising inflation rates on the Indian Money markets. Thus the research was conducted to explore the relationship between short term lending instruments and WPI Prices. Data Collection: Secondary data was collected from published sources like IMF, WTO and RBI for the accounting year 2012 Sample Size: The sample size consist of weekly time series data of Mid Rates of Commercial Paper (CPs) & Certificate of Deposit (CDs), Weekly call Money rates and 91 Day Treasury Bills rate and weekly Inflation rate of Indian economy The time series data included 51 observations ranging from 25th May 2012 to 10 June 2011. Data Analysis: To understand the impact of inflation rates on the Indian Money markets, Regression analysis was employed to derive the cause effect relationship. Statistical analysis like ANOVA was used to understand the mean difference amongst the variables. Therefore SPSS 16 and Excel software were used for the purpose of analysis. FINDINGS & ANALYSIS Call Money Rates H (0)1: There is no existence of a significant relationship between call money rates and Inflation rate in Indian economy H (1)1: There exists a significant relationship between call money rates and Inflation rate in Indian economy Table (1): Regression Statistics
Multiple R R Square Adjusted R Square Standard Error Observations Table (2): ANOVA df Regression Residual Total 1 49 50 SS 0.0044 0.038135 0.042536 MS 0.0044 0.000778 F 5.654037 Significance F 0.021361 0.321639 0.103451 0.085154 0.027898 51

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Journal of Management (JOM) ISSN 2347-3940 (Print), ISSN 2347 3959 (Online), Volume 1, Issue 1, July-December (2013) Table (3): Residual Statistics
Coefficients Intercept Log_ inflation 0.802152 -0.11423 Standard Error 0.051705 0.048041 t Stat 15.5139 -2.37782 P-value 1.53E-20 0.021361

Data Interpretation: From Table (2), it has been found that the p value or the Significance is 0.021361which is quite lesser than 0.05 at 95% confidence level. The ANOVA table explains that there do exist a statistical significant relationship amongst the predictor and dependent variables. Table (1) describes the strength of relationship between predictor and dependent variables. The R square stands at 10.3% which denotes that there exists a very weak correlation amongst the variables. Table (3) on other hand helps in deriving the linear regression equation from the above statistical coefficients: Log CMR = -0.802152 0.11423* Log_ IR+ 0.051705* E where, CMR: Log of Call money rate IR: Log of Inflation Rate E: Error Term Thus from the above analysis, we reject the null hypotheses and accept the alternative hypotheses that there exists a significant relationship between significant relationship between call money rates and Inflation rate in Indian economy 91 Day Treasury Bills H (0)2: There is no existence of a significant relationship between 91 Day T Bill rates and Inflation rate in Indian economy H (1)2: There is existence of a significant relationship between 91 Day T Bill rates and Inflation rate in Indian economy Table (4): Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations Table (5): ANOVA df Regression Residual Total 1 49 50 SS MS 0.002672 0.002672 0.006716 0.000137 0.009388 F 19.49173 Significance F 5.56E-05

0.533465 0.284585 0.269985 0.011708 51

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Journal of Management (JOM) ISSN 2347-3940 (Print), ISSN 2347 3959 (Online), Volume 1, Issue 1, July-December (2013) Table (6): Residual Statistics Coefficients 0.765864 0.014743 Standard Error 0.03773 0.003339 t Stat 20.29837 4.414944 P-value 1.69E-25 5.56E-05

Intercept Log_ inflation

Data Interpretation: From Table (5), it has been found that the p value or the Significance is 5.56E05which is quite lesser than 0.05 at 95% confidence level. The ANOVA table explains that there do exist a statistical significant relationship amongst the predictor and dependent variables. Table (4) describes the strength of relationship between predictor and dependent variables. The R square stands at 28.45% which denotes that there exists a strong correlation amongst the variables. Table (6) on other hand helps in deriving the linear regression equation from the above statistical coefficients: Log 91 T Bill = 0.765864 + 0.014743* Log_ IR+ 0.03773* E where, 91 T Bill rate: Rate on 91 Day Treasury Bills issued by Indian government IR: Log of Inflation Rate E: Error Term Thus from the above analysis, we reject the null hypotheses and accept the alternative hypotheses that there exists a significant relationship between significant relationship between 91 Day T Bill rates and Inflation rate in Indian economy Commercial Paper H (0)3: There is no existence of a significant relationship between mid rates of Commercial Paper and Inflation rate in Indian economy H (1)3: There is existence of a significant relationship between mid rates of Commercial Paper and Inflation rate in Indian economy Table (7): Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations Table (8): ANOVA df Regression Residual Total 1 49 50 SS 5.47E-06 0.017745 0.017751 MS 5.47E-06 0.000362 F 0.015109 Significance F 0.902676

0.017557 0.000308 -0.02009 0.01903 51

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Journal of Management (JOM) ISSN 2347-3940 (Print), ISSN 2347 3959 (Online), Volume 1, Issue 1, July-December (2013) Data Interpretation: From Table (8), it has been found that the p value or the Significance is 0.902676 which is quite higher than 0.05 at 95% confidence level. The ANOVA table explains that there does not exist a statistical significant relationship amongst the predictor and dependent variables. Table (7) describes the strength of relationship between predictor and dependent variables. The R square stands at 0.03% which denotes that there exists a negligible correlation amongst the variables. Thus from the above analysis, we accept the null hypotheses that there is no existence of a significant relationship between mid rates of Commercial Paper and Inflation rate in Indian economy Certificate of deposit H (0)4: There is no existence of a significant relationship between mid rates of Certificate of Deposit and Inflation rate in Indian economy H (1)4: There is existence of a significant relationship between mid rates of Certificate of Deposit and Inflation rate in Indian economy Table (9): Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations Table (10): ANOVA df Regression Residual Total 1 49 50 SS MS 0.000128 0.000128 0.01674 0.000342 0.016868 F 0.37362 Significance F 0.543863

0.08699 0.007567 -0.01269 0.018484 51

Data Interpretation: From Table (10), it has been found that the p value or the Significance is 0.543863which is quite higher than 0.05 at 95% confidence level. The ANOVA table explains that there does not exist a statistical significant relationship amongst the predictor and dependent variables. Table (9) describes the strength of relationship between predictor and dependent variables. The R square stands at 0.7% which denotes that there exists a negligible correlation amongst the variables. Thus from the above analysis, we accept the null hypotheses that there is no existence of a significant relationship between mid rates of Certificate of Deposit and Inflation rate in Indian economy CONCLUSIONS Technical analysis has been conducted on Indian Money Markets due to recent Inflation problems which has global effect across different sectors of the world economies. It can be interpreted from the results that soaring Inflation has left some considerable effects on Indian Money Markets. It has been found that due to this growth in prices it has greatly affected the lending rates of short term financial instruments thus making borrowings costlier
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Journal of Management (JOM) ISSN 2347-3940 (Print), ISSN 2347 3959 (Online), Volume 1, Issue 1, July-December (2013) for the market participants. The major reason behind this decline is high soaring oil prices and increasing cost of raw materials for generating electric power. Further analysis of the study has also revealed that there is much impact of inflation on Call money rates and 91 Day T bill rates, whereas mid rates of CDs and CPs have remain unaffected. One possible reason could be that call money and 91 Day T Bill rates are issued on weekly basis that are highly sensitive to inflationary conditions compared to fortnightly basis of CDs and CPs rates. Indian Money Markets are one of the core pillars of Indian Financial system since they fulfil short term liquidity requirements of the economy. Rising Inflation can lead to sharp fall in demand short term funds and also steep decrease in investors confidence. Thus Indian government should take quick steps to combat with this rising inflation as it not only affects the money markets but also make it difficult for the country to achieve the sustainable economic growth.. REFERENCES 1. Augustine C. Arize, Kiseok Nam (2012), The Demand for Money in Asia: Some further Evidence; International Journal of Economics and Finance, Vol: 4, No.: 8, August 2012, pp 59 Carren Pindiriri (2012), Monetary Reforms and Inflation Dynamics in Zimbabwe; International Research Journal of Finance and Economics, No: 90, May 2012, pp 207222 Fernandomierzejewski (2012), The Optimal Liquidity Principle and the Aggregate Money Demand; IMA Journal of Management Mathematics, Vol.: 23, No: 3, July 2012, pp 241-264 Jayanth Varma (1997), Indian Money Market: Market Structure, Covered Parity and Term Structure, The ICFAI Journal of Applied Finance, July 1997, Vol 3, No: 2, pp 110 Massimilianomarzo; Paolozagaglia (2012), Trading Directions and the Pricing of Euro Interbank Deposits in the Long Run, Applied Economics Letters, Vol.: 19, No.: 18, December, 1 2012, pp: 1827-1839 rbidocs.rbi.org.in (www.rbi.com)

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