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Influence of Foreign Institutional Investments (FIIs) on the Indian stock market

Listed author(s):
  • Vardhan, Harsh
  • Sinha, Pankaj

The study examines influence of FIIs on the Indian equity market and its role in integration with US equity market. It provides insight for policy formulation in order to move towards greater liberalized FII’s policy regime for regaining FIIs confidence in the Indian equity market. The time line from January 1999 to December 2010 has been partitioned into smaller time frames due to existence of structural breaks in order to capture clear picture of dynamic relationships between variables in the sub - periods. The daily data has been analyzed by Vector Autoregressive framework using different VAR models for determining existence of short term and long run relationships during sub periods and for ascertaining causality between emerging relationships between FIIs, Sensex and other key variables. Despite global recessionary condition both purchase and sales of FIIs have steadily increased due to gradual economic liberalization and it has substantially picked up the pace during the last five years. It was observed for 1/3/1999 to 31/7/2003 period that FII inflows and out flows are significantly influenced by the returns in the domestic equity market. The exchange rate has no effect on the inflows of FIIs; however the outflows are influenced by the change in the exchange rate. SENSEX returns bring change in the exchange rates. Change in the exchange rate affects the outflow of FIIs. The US equity market has no influence on FII’s inflows but has marginal influencing role on its outflows.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53611.

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Date of creation: 25 Jan 2014
Handle: RePEc:pra:mprapa:53611
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  1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters,in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
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  4. Bekaert, G. & Harvey, C. R. & Lumsdaine, R. L., 2002. "The dynamics of emerging market equity flows," Journal of International Money and Finance, Elsevier, vol. 21(3), pages 295-350, June.
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  6. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
  7. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
  8. Warther, Vincent A., 1995. "Aggregate mutual fund flows and security returns," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 209-235.
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