Abstract
This paper examines the influence of foreign institutional investments in explaining the short and long run relationship of the Indian equity market with the global equity markets. Using daily return series and equity portfolio investments made by foreign institutional investors, we find that the activity of foreign equity portfolio investors contains significant information in explaining the short and long term comovements of the Indian market with the global equity markets. The linkages have become pronounced particularly in the second half of the sample period. We conclude that the rapid growth in the flow of the foreign equity portfolio investments is leading to greater integration of the Indian equity market with the global markets which may have significant implications for asset pricing and international portfolio diversification benefits.
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