The Role of Institutional Investors in The Indian Stock Markets During the Pandemic

Research Question: The study evaluates the behaviour of the FIIs and DIIs on the returns and volatility of the four major Indian stock indices namely, Nifty 50, Nifty Next 50, BSE Sensex, and BSE 100 before and during the pandemic of COVID-19. To capture the volatility, exogenous variable, India VIX has been used. Motivation: Due to the stringent measures taken by several countries in response to the COVID-19 pandemic, there was an initial downturn in the global economic prospects and a meltdown in the financial markets. Idea: It made the individual investors curious about the behaviour of institutional investors to take a position amidst the highly uncertain environment. Data: The daily data of buying and selling of FIIs and the DIIs and the four indices have been obtained from the period January 1, 2011, to April 3, 2020. Further, the study is divided into three sub-periods that is full, before COVID and during COVID. Method/Tools: Various analysis were performed using correlation, rolling correlation, Granger causality, GARCH, GJR-GARCH and EGARCH to gauge the relationship between activities of FIIs and DIIs and the market returns. Findings: The outcome of the analysis reveals that both the FIIs and DIIs play significant role in generating the returns and volatility in the Indian stock market. However, during the pandemic of COVID-19, the FIIs led the market returns and DIIs led the volatility. This is due to the fact that the DIIs were the net buyers during this period and the distribution of their net position was positively skewed. The leverage effect is also observed. The persistence of the volatility is highest during COVID-19. Contributions: The study is one of a kind adding to the existing body of knowledge related to the behaviour of FIIs and DIIs during the global epidemic. It is the most recent and closely related to the literature on capturing FII and DII investment patterns during a global pandemic.