Foreign Institutional Investment Flows Research Articles

Indian Experience of Managing Impossible Trinity, Growth and Possible Tradeoff Between FDI and FIIs: Nature of Capital Inflows Matter

The current focus emphasizes the difficult choices faced by Indian management of the impossible trinity to manage import-led growth. The management highlights two mechanisms by which FDI (foreign direct investment) flows are easily substituted for short-run FII (foreign institutional investment) flows. First, GDP and its growth in an open economy framework and the associated international trade participation can clarify this substitution prospect. Specifically, this study develops reasoning whereby imports under the trilemma management can give some decisive advantage to FII at the cost of FDI to manage Indian import-led growth. Second, it underlines how the related policies, especially the sterilization interventions, constrain the interactions of higher domestic investments (domestic savings), spillover impacts of imports of intermediate and capital goods, and specialized FDI. If so, the Indian economy’s import-led growth can indicate FII and FDI tradeoffs. The study uses the ARDL regression method. The results show that the Indian policy-led macro environment can limit the scope of specialized FDI that aims to induce advanced domestic investment, exports, and FDI interactions. India’s focus on import-led growth thereby underpins how FII substitutes FDI. JEL Classification F21, F3, F4, O11, O14

Dynamic relationship between equity, bond, commodity, forex and foreign institutional investments: Evidence from India

The interrelationship between equity, bond, commodity and forex movements can provide investors with abundant trading opportunities regardless of whether one market is trending upward or downward. Hence, to understand the interlinkage between markets, this study examines the long-run and causal linkage between forex, G-sec bonds, oil prices, gold rates, foreign institutional investment (FII) flows, and equity market and sectoral index returns. Daily time-series data from August 2012 to August 2021 were considered for empirical analysis. Johansen’s cointegration test revealed that foreign exchanges like USD, Euro, GBP and Yen, oil and gold rates, G-bond returns and FII flows were significantly cointegrated with the stock market and sectoral indices in the long run. Further, Granger causality found a uni-directional relationship between forex rates (i.e., USD, Euro, Yen) and the market, as well as sectoral indices, except Nifty 50 and Nifty IT indices. Oil price movements were found to effectively predict future price changes of Nifty consumer durables, auto, IT indices. Gold prices are useful to predict Nifty-Auto, Bank, Financial Services, Oil & Gas and PSU. The study also found a bi-directional relationship from FII inflows to the stock market and sectoral indices. The findings suggest that forex rates, oil prices and FII flows significantly affect India’s stock market and sectoral performance. The study contributes to the existing literature by comprehensively examining the interlinkage between commodities such as oil and gold, foreign exchanges like USD, Euro, GBP and Yen, G-bond, FII flows and the stock market, and fourteen sectoral indices in the Indian context.

Foreign institutional investment flows in Indian economy: an empirical study

The command of LPG (liberalisation, privatisation and globalisation) has been one of the major decisions taken by the Indian government in the aftermath of the deteriorating condition of Indian economy (Sumanjeet and Paliwal, 2010). When India opened its doors, as expected, foreign investment flew in with great amount. Amongst various forms of foreign investment, FII flows have been the major components. Brenton et al.'s (1999) FII since their entry in 1992 till date have been showing great existence in terms of their numbers registered with SEBI and the amount of investment in Indian equity and debt market. Various FIIs (major fund investors) have come from various countries. It has been observed that amongst various components of FPI like FIIs, ADRs/GDRs and offshore funds, FIIs have constituted the major proportion (Akula, 2011).

Foreign institutional investment flows in Indian economy: an empirical study

The command of LPG (liberalisation, privatisation and globalisation) has been one of the major decisions taken by the Indian government in the aftermath of the deteriorating condition of Indian economy (Sumanjeet and Paliwal, 2010). When India opened its doors, as expected, foreign investment flew in with great amount. Amongst various forms of foreign investment, FII flows have been the major components. Brenton et al.'s (1999) FII since their entry in 1992 till date have been showing great existence in terms of their numbers registered with SEBI and the amount of investment in Indian equity and debt market. Various FIIs (major fund investors) have come from various countries. It has been observed that amongst various components of FPI like FIIs, ADRs/GDRs and offshore funds, FIIs have constituted the major proportion (Akula, 2011).

Dynamics of FII flows and stock market returns in a major developing country: How does economic uncertainty matter?

AbstractWe apply the wavelet coherency and phase difference methodology to explore the nature of the relationship and the direction of causality between foreign institutional investment (FII) flows and stock market returns across time and frequency domain for the fast‐growing Indian economy. Since both variables are affected by economic uncertainty, we have estimated the partial wavelet coherency and the phase difference to discern the impact of economic uncertainty on the dynamic relationship and causality between those variables. Both the FII flows and the stock market return move together during the periods of the global financial crisis and the European sovereign debt crisis without any causality in the short run, but the stock market leads the FII inflows in the long run. However, in the bull market the stock market Granger causes the FII inflows both in the short run and in the long run. Nonetheless, economic uncertainty drives the co‐movement and also masks the causality effect between those two variables. Thus, the results require policymakers to set out a transparent economic environment to reap the benefits of FII flows. As far as the FII outflows are concerned, profit booking and economic uncertainty drive the relationship and the causality in the short run. Hence, policymakers and portfolio managers should be concerned about FII outflows in the long run, while in the short run, it is a normal trading activity.

Dynamic Interactions between Foreign Institutional Investment Flows and Stock Market Returns – The Case of India

There has been a marked increase in the magnitude of Foreign Institutional Investments (FIIs) into India since the 1990s, resulting in increased forex reserves and liquidity and a higher-valued Indian capital market. However, such investment is more volatile than other types of flows, causing disruptive effects in the form of sudden stops (for example, the crash of the Indian stock market on January 21, 2008). This study empirically examines the dynamic relationship between FIIs and Indian stock market returns. It also analyses the effects of FIIs on Indian capital market returns, using data from January, 2004 through September, 2012. The analysis employs a Cross Correlation Function (CCF) approach, a Granger Causality Test and Vector Auto Regression after dividing the data into two parts: Pre Global financial crisis and Post Global financial crisis periods. The results of the CCF suggest bi-directional causality between FIIs and Nifty returns, whereas the Granger Causality Test and the VAR analysis suggest uni-directional causality running Nifty returns to FIIs.

Estimating Changing Significance of Determinants of FII Flows to India Over Different Time Periods in a Vector Autoregressive Framework Using Daily Data

This paper aims at exploring the causal relationship between net foreign institutional investment flows to the Indian equity market with its possible covariates based on daily data for the period September 2008 to July 2013. The data has been analyzed in a Vector Autoregressive framework for determining the existence of long run relationships. Augmented Dickey Fuller (ADF) test and Johansen co-integration technique have been adopted for stationary test and co-integration. The explanatory variables chosen are domestic and US equity market returns, historic volatility of both domestic and US equity market returns, expected volatility of both domestic and US equity markets and the rupee dollar exchange rate. The study has been done for different time phases of Indian stock market sentiment to identify whether the explanatory variables chosen differ in their explanation of FII net inflows, controlling for market sentiment.

Cause and effect between FII trading behaviour and stock market returns

PurposeThe purpose of this paper is to examine the direction of causality between foreign institutional investment (FII) trading volume and stock market returns in the Indian context. There is evidence of uni‐directional causalities from stock returns to FII flows across various sample periods. The paper attempts to establish whether net FII trading volume causes variations in stock market returns or vice versa.Design/methodology/approachUsing daily data on three different measures of FII trading volume as proxy for FII trading behaviour and S&P CNX Nifty returns, Granger‐causality approach is applied to investigate the bi‐directional causality between net FII trades and returns.FindingsBi‐directional causality between net FII investment and Indian stock market return is observed. In general, the FIIs seem to be chasing the Indian stock market returns. It is found that FII trading behaviour resulting in heavy trading volumes may cause variations in stock market returns only in the very short‐term, but afterwards, it is the stock market returns which cause changes in FII trading behaviour.Research limitations/implicationsSince foreign equity investors monitor the movement of stock prices, and furthermore, the role of FIIs' exerting impact on Indian stock markets tends to be growing, the authorities will have to develop an environment where FIIs would maintain their positions with confidence, thereby making the markets, as well as investments, more stable. This research considered only stock market returns to test its relationship with three measures of FII trading volume; more macroeconomic as well as microeconomic variables may further be considered for the purpose.Originality/valueThe paper contributes some empirical evidence using three different measures of FII trading volume as proxy of FII trading behaviour, and its bi‐directional relationship with Indian stock market returns.

Foreign Institutional Investment Flows and Indian Financial Market: Relationship and Way Forward

The widespread pecuniary crises across the globe have raised a large number of questions regarding the interdependence of economies on the financial front. The interactions and linkages of global markets amongst each other have led to drastic breakdown of the financial machinery of the economies. Foreign direct investment (FDI) and foreign institutional investment (FII) in recent years have been preferred over other sources of external finance as they are non-debt creating and non-volatile in nature. FDI and FII also facilitate international trade and transfer of knowledge, skills and technology. FIIs, which refer to capital flows across national borders, have risen sharply across the world and in India specifically since 1991. At present there exist widespread apprehensions regarding the nature and extent of FII flows to the Indian financial market. This research paper aims to analyze the relationship between the FII and market indices of the Indian stock market over a period of 10 years, that is, from 2000 to 2010. The study will also emphasize on the way forward for encouraging FII flows into the country and their impact on the economy of the country.

Impact of Fiis on Indian Economy

Since the beginning of liberalization in 1990s, FII flows to India have steadily grown in importance. From a near absence of FII inflows till 1992, today such inflows represent a dominant proportion of total flows. Positive fundamentals, gradual removal of structural barriers combined with fast growing markets have made India an attractive destination for foreign institutional investors. Funds flow from FIIs have crossed the record Rs 97,900 crore mark this year. The net purchase of Rs 97,955.50 crore ($21.42 billion ) is the higher ever investment by overseas firms in any single year in India . Today, FIIs are the key drivers of the Indian equity market and rising stakes in Indian companies. But, at the same time there is unease over the volatility in foreign institutional investment flows and its impact on the different segments of the economy. The increase in the volume of foreign institutional investment (FII) inflows in recent time has led to concerns regarding the volatility of these flows, threat of capital flight, its impact on the stock markets and influence of changes in regulatory regimes.. Globally strong consensus has emerged that the achievement of more dynamic economic growth requires a greater role of the foreign capital. There was a surge in foreign capital flows into India after 1992-93, because of drastic changes in India's policies. Since then Government of India have been relaxing capital control measures and taking large number of policy decisions towards the improvement of local financial infrastructure. Because of this, foreign capital has become an integral part of the development strategy of India. The main objective of the present study is to investigate the impact of FIIs on economic growth of Indian economy.

The Causal Relationships in Mean and Variance between Stock Returns and Foreign Institutional Investment in India

This paper examines the causalities in mean and variance between stock returns and foreign institutional investment (FII) in India. The analysis in this paper applies the cross-correlation function approach from Cheung and Ng (1996), and uses daily data from January 1999 to March 2008 divided into two periods before and after May 2003. Empirical results showed that there are uni-directional causalities in mean and variance from stock returns to FII flows irrelevant of the sample periods, while the reverse causalities in mean and variance are only found in the period beginning with 2003. These results point to FII flows having exerted an impact on the movement of Indian stock prices during the more recent period.

An Empirical Analysis of Foreign Institutional Investment and Stock Market Returns in India

Augmented Dickey Fuller and Phillips-Perron tests were employed to examine the stationarity of both net foreign institutional investment and NSE market return series. Besides, Instantaneous Granger Causality test was employed to examine the contemporaneous relationship between net foreign institutional investment flows and equity market returns in India for the pre-global financial crisis and during a crisis period. By and large, our analysis reveals that there is an evidence of negative feedback trading hypothesis and positive feedback trading hypothesis by foreign investors before the global financial crisis period and during a crisis period respectively. This implies that foreign institutional investment acts as smoothening effect and destabilizing forces before and during the crisis period respectively. However, such positive feedback trading strategies from foreign institutional investors seem to be rational during the period of global financial crisis.

Foreign Institutional Investment and Stock Market Returns in India: Evidence from ARDL Bounds Testing Approach

The paper uses Autoregressive Distributed Lag (ARDL) bounds testing approach to examine the dynamic behaviour of net foreign institutional investment flows on stock market returns in India for the daily data series from 1 st July, 1999 to 28 th February, 2009. By and large, the analysis reveals that there is an evidence of positive and negative feedback trading hypothesis in the short-run and long-run respectively. This implies that foreign institutional investment acts as destabilising forces in the short-run and has a smoothening effect in the long-run.

Foreign Institutional Investment Flows (FII) in Indian Companies

India has witnessed over a decade of FIIs portfolio flows and with each passing year, these flows have gained in their significance and have played a key role in the overall Indian economy. Investments by foreign institutional investors are typically synonymous with portfolio investments in India, with more than three months left in the current calendar year FIIs have invested a net of $10.47 billion in Indian equities, just $0.23 billion short of record high ($10.7 billion) they clocked in the whole calendar year 2005. And this is at a time when the Bse sensex and the 50 share nifty of the national stock exchange are at their all time high. As the major portion of the FIIs investment goes in to equity markets it would have an impact on the shareholding pattern of Indian companies listed on the stock exchanges. About 95% of the FII funds are invested in stocks that comprise the key indices and half of it in the top five stocks that comprise the key indices, their influence on the performance of the stock market is immense. By taking quarterly shareholding pattern data of Bse sensex companies from Dec. 2001 to Dec.2006, we attempt to examine the changes if any, in the proportion of various shareholders in the overall shareholding pattern of these companies. We find that over the study period FIIs investment in Bse sensex companies is on the booming spree but it is still inadequate as compared to the size of our capital market and the prevailing favorable international economic conditions.

Impact of Foreign Institutional Investments on Domestic Stock Market: An Evidence From Indian Stock Market

It is evident from the number of studies that investments by Foreign Institutional Investments and the movements of Sensex are quite closely correlated in India and Foreign Institutional Investment (FIIs) wield significant influence on the movement of Sensex. In Indian stock market, FIIs have a disproportionately high level of influence on the market sentiments and price trends. Because of this local market participants perceive the decision taken by FIIs in their assessment of the market and tend of follow FIIs. With this context, the present study tries to examine: the association of the Bombay stock Exchange Sensitivity Index (Sensex) with the net FII flows by applying the coefficient through the historical volatility of the market Results of this study show that not only the FIIS are the major players in the domestic stock market in India, but their influence on the domestic markets is also growing. There is a partial correlation between the BSE Sensex and FIIs. Volatility is measured as the standard deviation of monthly closings of the Sensex. This remained almost stable for an eleven year period. Last quarterly results indicate a heavy investment by international funds. Heavy investments of funds amplify the results on high deviations which induce high fluctuations in the market.

Foreign Institutional Investment in the Indian Equity Market: An Analysis of Daily Flows during January 1999-May 2002

Foreign Institutional Investment in the Indian Equity Market: An Analysis of Daily Flows during January 1999-May 2002