Re-Examining the Impact of FII Investments on the Indian Markets

Abstract

This paper examines the impact of daily foreign institutional investors’ (FIIs) investments on the Indian market from January 2010 through January 2014. The motivation for the study is that the past studies on this topic are based only on examining the relationship between FII investments in cash market and any associated effects on stock market returns while ignoring the FII activity in equity derivative markets. The impact of FIIs’ investments on Indian markets is re-examined in this paper by considering FII activity in Nifty index futures that trade on National Stock Exchange of India (NSE) and Singapore Exchange (SGX). The results show that Nifty index returns are statistically influenced by FII investments in Nifty index futures. Further, Nifty index returns effect the FIIs’ investments in Nifty index futures. Prima facie there is evidence of positive feedback trading behavior of FIIs. Hence, FIIs’ index futures activity could be used to predict the Nifty returns. There is a contemporaneous relationship between FIIs investments in cash and index futures market. SGX futures are not found to be influencing Nifty but Nifty is a significant explanatory variable in SGX futures returns.