Dynamics of Foreign and Domestic Institutional Investment in India

Abstract

Foreign and Domestic institutional investment are among the important factors which determine the stock market movements. This paper investigates the short-term relationship among FII, DII and stock market returns. The daily FII, DII net investment and Nifty returns data from April 2008 to March 2017 were used for this study. Granger causality test and Impulse response analysis were used to document the relationship between the institutional investment and stock market returns. Nifty return was used as a proxy for stock market returns. One-way causality was observed from FII to DII net investment. Nifty returns were found to be the cause of FII and DII net investment and not the effect. FII responds positively to an impulse from Nifty returns and DII responds negatively to an impulse from Nifty returns. Hence it can be concluded that FIIs follow positive feedback trading and DIIs follow the exact opposite method.