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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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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 0.321639
R Square 0.103451
Adjusted R Square 0.085154
Standard Error 0.027898
Observations 51
Table (2): ANOVA
df SS MS F Significance F
Regression 1 0.0044 0.0044 5.654037 0.021361
Residual 49 0.038135 0.000778
Total 50 0.042536
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Table (3): Residual Statistics
Coefficients
Standard
Error t Stat P-value
Intercept 0.802152 0.051705 15.5139 1.53E-20
Log_ inflation -0.11423 0.048041 -2.37782 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 0.533465
R Square 0.284585
Adjusted R Square 0.269985
Standard Error 0.011708
Observations 51
Table (5): ANOVA
df SS MS F Significance F
Regression 1 0.002672 0.002672 19.49173 5.56E-05
Residual 49 0.006716 0.000137
Total 50 0.009388
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Table (6): Residual Statistics
Coefficients
Standard
Error t Stat P-value
Intercept 0.765864 0.03773 20.29837 1.69E-25
Log_ inflation 0.014743 0.003339 4.414944 5.56E-05
Data Interpretation:
From Table (5), it has been found that the p value or the Significance is 5.56E-
05which 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 0.017557
R Square 0.000308
Adjusted R Square -0.02009
Standard Error 0.01903
Observations 51
Table (8): ANOVA
df SS MS F Significance F
Regression 1 5.47E-06 5.47E-06 0.015109 0.902676
Residual 49 0.017745 0.000362
Total 50 0.017751
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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
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
Multiple R 0.08699
R Square 0.007567
Adjusted R Square -0.01269
Standard Error 0.018484
Observations 51
Table (10): ANOVA
df SS MS F Significance F
Regression 1 0.000128 0.000128 0.37362 0.543863
Residual 49 0.01674 0.000342
Total 50 0.016868
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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 investor’s 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
2. Carren Pindiriri (2012), “Monetary Reforms and Inflation Dynamics in Zimbabwe”;
International Research Journal of Finance and Economics, No: 90, May 2012, pp 207-
222
3. 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
4. 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 1-
10
5. 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
6. rbidocs.rbi.org.in (www.rbi.com)
