Sector Specific Determinants of Foreign Portfolio Investment Inflows in India: A Panel ARDL Approach

Abstract

This article investigates the factors that influence foreign portfolio investment (FPI) inflows to various sectors in India from February 2012 to July 2020. We find evidence that in the short-run FPI inflows in India have a significant positive relationship with the index of industrial production (IIP), foreign direct investment (FDI) and market capitalization (MC) while a significant negative relationship with the US dollars exchange rate (DEXR) and real effective exchange rate (REER). The results of the panel autoregressive distributed lag (ARDL) approach show that sectoral FPI inflows to the various sector in India have a significant negative relationship with interest rate differential (IRD), MC and the US DEXR in the long run. However, in the long run, it has a significant positive relationship with international liquidity (IL) and REER. In addition, we observe that for all sectors the interest rate differential boosts FPI inflows in India except for new economy sectors. The policy prescription of the study points toward the creation of a conducive investment climate to encourage foreign portfolio investors.