JAIIB IE and IFS Paper-1 Module-D Unit 6 : Interconnectedness Of Markets And Market Dynamics

29/07/2023

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JAIIB Paper 1 (IE and IFS) Module D Unit 6 : Interconnectedness Of Markets And Market Dynamics (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 1 (Indian Economy & Indian Financial System) includes an important topic called “Interconnectedness Of Markets And Market Dynamics”. Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 1 (IE and IFS) Module D (FINANCIAL PRODUCTS AND SERVICES ) Unit 6 : Interconnectedness Of Markets And Market Dynamics , Aspirants must go through this article to better understand the topic, Interconnectedness Of Markets And Market Dynamics and practice using our Online Mock Test Series to strengthen their knowledge of Interconnectedness Of Markets And Market Dynamics. Unit 6: Interconnectedness Of Markets And Market Dynamics

Process Of Interconnectedness of Financial Markets

With the development of the economy and with the forces of globalisation setting in, the different financial markets in India are interconnected with each other and integrated with markets in other parts of the world, as well.
Similarly, other countries in the world are connected to one another and the ups and downs in one part of the globe can have a resonating effect, on other parts of the globe.
“Coupling” of economies and disturbances when they spread, which can be called as “contagion effect”.
Integration of financial markets is a process of unifying markets and enabling convergence of risk-adjusted returns on the assets of similar maturity, across the markets.
The process of integration is facilitated by an unimpeded access of participants to various market segments. Financial markets all over the world have witnessed growing integration within as well as across boundaries, spurred by deregulation, globalisation and advances in information technology.

Reasons For Interconnectedness

The implications of integration of the financial markets are as under:

Capital has become more mobile across national boundaries, as nations are increasingly relying on savings of other nations, to supplement the domestic savings.
Technological developments in electronic payment and communication systems have substantially reduced the arbitrage opportunities across financial centres, thereby aiding the cross-border mobility of funds.
Changes in the operating framework of monetary policy, with a shift in emphasis from quantitative controls to price-based instruments such as the short-term policy interest rate, brought about changes in the term structure of interest rates.
Harmonisation of prudential regulations, in line with international best practices, by enabling competitive pricing of products, has also strengthened the market integration process.

Importance Of Interconnectedness Of Financial Markets

If markets functioned on stand-alone basis and were not interconnected, there would be ample scope of arbitrage between the different segments, which in turn, would make the markets imperfect.

Other points which bring out the importance of market integration are listed below:

Serve as a conduit for authorities to transmit important price signals.
Efficient and integrated financial markets constitute an important vehicle for promoting domestic savings, investment and consequently economic growth.
Fosters the necessary condition for a country’s financial sector, to emerge as an international or a regional financial centre.
Enhances competition and efficiency of intermediaries in their operations and allocation of resources, contributes to financial stability.
lead to innovations and cost-effective intermediation, thereby, improving access to financial services for members of the public, institutions and companies alike.
Induce market discipline and informational efficiency.
Promotes the adoption of modern technology and payment systems to achieve cost effective financial intermediation services.

Different Levels Of Market Integration

Financial markets can be observed to be integrated at three different levels, viz., domestic, global and regional.

Domestic financial integration: Domestic markets may be closely integrated because some of the intermediaries operate simultaneously in various market segments; for instance, commercial banks operate in both the saving (deposit) and loan markets.
Global financial integration: Refers to the opening up of domestic markets and institutions to the free cross-border flow of capital and financial services, by removing barriers such as capital controls and withholding taxes.
Regional financial integration: Occurs due to ties between a given region and the major financial centre serving that region. Economic integration might be easier to achieve at a regional level, due to network externalities and the tendency of market makers to concentrate in certain geographical centres.

Asian Clearing Union

Asian Clearing Union (ACU) is a payment arrangement, whereby the participants settle payments for intra-regional transactions among the participating central banks, on a net multilateral basis.
Objectives: To facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade and banking relations, among the participating countries.
The need for the formation was felt as early as in the 1930s, due to foreign exchange shortages, the breakdown of the gold standard, and the collapse of the international capital markets, forcing the Governments to introduce controls on foreign exchange and foreign trade on the one hand and to sign bilateral trade and payments agreements on the other.

Established at the initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP),
Established: December 1974, when the countries in the region were facing settlement difficulties, mainly due to resource constraints.
A clearing union can be defined as a multilateral payments arrangement that periodically offsets the debits and credits accumulated by each member against the other members in the process of trade and other transactions.
Multilateral clearing or payments arrangements facilitate the use of national currencies, and thus, serve to relax the foreign exchange constraints of the members.
Members: Bangladesh, Bhutan. India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka.

The important reasons for the formation of a clearing union are:

Exports and imports among members can expand relatively faster because of conservation of foreign exchange in intra-group transactions, at least until the settlement date.
Trade liberalisation can be promoted initially among the members.
Exploitation of scale economies would be made possible by enlarged trade.
An adjustment process can be promoted that would raise the international competitiveness of the members which have similar distortions in trade and production.
Measures and surveillance by the union can help to secure a more balanced current account which in turn, contributes to the creation of conditions for the future convertibility of each of the currencies of member countries.
Ground can be prepared for regional economic co-operation in general and for monetary and financial co-operation in particular.

JAIIB Paper 1 Module D Unit 6 – Interconnectedness Of Markets And Market Dynamics (Ambitious Baba)