FII, Stock Exchange Return, and the Leverage Effect: Evidence from India

Abstract

The present study examines the impact of foreign institutional investment (FII) on SENSEX returns and exchange rate and vice versa. The study considers the monthly data of five years (from January 1, 2010 to December 31, 2014) of BSE SENSEX, exchange rate (INR/USD), and net FIIs. The results of vector autoregression analysis, impulse response, variance decomposition, and Granger causality indicates that net FIIs are neither affected by exchange rates nor by SENSEX movements, but exchange rates and SENSEX returns are affected by FIIs. Higher foreign inflow needs more liberalized policies along with better economic and political environment to gain the confidence of foreign investors. Foreign institutional investors are looking for enhanced investment in emerging markets, and India is among them. The share of FII in the Indian market is increasing largely as it was INR 16,364.60 crores in January 2004, compared to INR 82,420.23 crores in December 2014, an increase of 400%. There is an emergent need to gain the confidence of foreign institutional investors to invest aggressively in India by implementing liberalized policies that boost the buoyancy of investors as far as India is concerned. Along with its relationship with SENSEX and exchange rate, we tried to capture the impact of news on the volatility of foreign institutional investors through threshold autoregressive conditional heteroskedasticity and threshold autoregressive conditional heteroskedasticity models with pictorial representation of the news impact curve on daily inflows of foreign institutional investment.