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Determinants of Foreign Institutional Investment in India: An Empirical Analysis

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  • P. Srinivasan
  • M. Kalaivani

Abstract

The purpose of the study is to explore the determinants of foreign institutional investments (FIIs) in India through the autoregressive distributed lag (ARDL) bounds testing approach. Using quarterly time series data, the empirical analysis was carried out for the period January 2004 to December 2011. Our study shows that exchange rate has significant negative impact on FII inflows both in the short run and long run, implying that depreciation of currency adversely affects the FII flows into India. Moreover, the Indian equity market returns has negative short-run and positive long-run effects on FII inflows to India. This confirms the evidence of positive and negative feedback trading hypothesis in the short run and long run, respectively. The US equity market returns have positive and significant influence on FII flows in the long run but positive and insignificant influence on FII flows in the short run. The risks associated with US equity market encourage foreign institutional investors to invest more in the Indian equity markets. Furthermore, domestic inflation exerts negative and positive significant influence on FII flows in the long run and short run, respectively. It can be concluded that FII inflows to India are essentially determined by exchange rate, domestic inflation, domestic equity market returns, returns and risk associated with US equity market.

Suggested Citation

  • P. Srinivasan & M. Kalaivani, 2015. "Determinants of Foreign Institutional Investment in India: An Empirical Analysis," Global Business Review, International Management Institute, vol. 16(3), pages 364-376, June.
    • Handle: RePEc:sae:globus:v:16:y:2015:i:3:p:364-376
    DOI: 10.1177/0972150915569925
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    Cited by:

    1. Garg, Reetika & Dua, Pami, 2014. "Foreign Portfolio Investment Flows to India: Determinants and Analysis," World Development, Elsevier, vol. 59(C), pages 16-28.
    2. Patricia Lindelwa Makoni, 2020. "Foreign Portfolio Investments, Exchange Rates and Capital Openness: A Panel Data Approach," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 100-113.
    3. Animesh Bhattacharjee & Joy Das, 2021. "Investigating the Long-run and the Short-run Relationship Between Domestic Macroeconomic Forces and Indian Equity Market: Evidence Based on ARDL Bounds Testing Approach," Paradigm, , vol. 25(1), pages 61-76, June.
    4. Tricia Mangal & Day-Yang Liu, 2020. "The impact of economic freedom on foreign portfolio investments: The case of the Caricom single market and economy," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(2), pages 213-222, March.
    5. Kapil Choudhary & Parminder Singh & Amit Soni, 2022. "Relationship Between FIIs’ Herding and Returns in the Indian Equity Market: Further Empirical Evidence," Global Business Review, International Management Institute, vol. 23(1), pages 137-155, February.
    6. Narayan Parab & Y. V. Reddy, 2020. "A cause and effect relationship between FIIs, DIIs and stock market returns in India: pre- and post-demonetization analysis," Future Business Journal, Springer, vol. 6(1), pages 1-10, December.
    7. Monica Singhania & Neha Saini, 2018. "Determinants of FPI in Developed and Developing Countries," Global Business Review, International Management Institute, vol. 19(1), pages 187-213, February.
    8. Saif Siddiqui & Preeti Roy, 2021. "Asymmetric Effects of Exchange Rate and Its Relationship with Foreign Investments: A Case of Indian Stock Market," Vision, , vol. 25(4), pages 415-427, December.
    9. Perekunah B. Eregha, 2019. "Exchange Rate, Uncertainty and Foreign Direct Investment Inflow in West African Monetary Zone," Global Business Review, International Management Institute, vol. 20(1), pages 1-12, February.
    10. T. Mohanasundaram & P. Karthikeyan, 2017. "Decisive Economic and Stock Market Indicators on Foreign Institutional Investments: Evidence from India," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 6(1), pages 43-57, February.
    11. P. Lakshmi & M. Thenmozhi, 2018. "Impact of foreign institutional investor trades in Indian equity and debt market: a three-dimensional analysis," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 45(3), pages 225-233, September.

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    More about this item

    Keywords

    FII inflows; equity market returns; exchange rate; inflation; ARDL-UECM; cointegration;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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