Impact Of FII in Indian Market

Topic Name:- Impact Of FII in Indian Market.

Harshal Patil

Div – A, Roll No. 42

 

  1. Corporate Governance and Foreign Investment in Indian IT

(Panicker et al 2016) This study investigates how corporate governance affects foreign investment in Indian IT companies. Foreign investment is crucial for growing economies like India because it provides needed capital. The research focuses on 113 Indian IT firms from 2005 to 2013, a sector with increasing foreign investment and early adoption of corporate governance practices. The study analyses how a company’s ownership structure (like promoter shareholdings) and board characteristics (number of directors) impact foreign investment. The findings indicate that companies with more concentrated promoter holdings tend to have less foreign investment, while larger boards attract more. However, the independence of board members doesn’t significantly affect foreign investment. Strong financial performance is key to attracting international investors.

  1. Role of Institutional Investors (FIIs and DIIs)

(Nikunj et al, 2024) This study investigates how Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) affect the Indian stock market, particularly during the COVID-19 pandemic. It looks at four major Indian stock indices (Nifty 50, Nifty Next 50, BSE Sensex, and BSE 100) and examines data from 2011 to early 2020, dividing the period into pre-COVID and during-COVID phases. The research uses statistical tools to understand the relationship between FII and DII activities and market performance. The findings reveal that both FIIs and DIIs significantly influence the Indian stock market’s returns and volatility. During the pandemic, FIIs were key in driving returns, while DIIs played a bigger role in managing volatility, likely because they bought more stocks when FIIs sold off. The study highlights how institutional investors’ behavior impacts the stock market during times of crisis.

  1. Impact of FII Flows on Indian Stock Market Volatility

( Suresh Kumar & Jasdeep Dhami, 2014) This research paper examines the impact of Foreign Institutional Investor (FII) investments on the volatility of the Indian stock market, particularly the BSE Sensex, after India’s economic liberalization in the 1990s. The study analyzes daily and monthly data from 2000 to 2012, dividing the period into pre-crisis (2000-2008) and post-crisis (2009-2012) phases. Using GARCH and ARCH statistical techniques, the authors investigate how FII flows affect market volatility. The findings suggest that FII investments have significantly influenced the volatility of the Indian stock market in both the pre- and post-crisis periods. The paper considers the broader effects of liberalization, privatization, and globalization on the Indian economy, along with both the advantages and disadvantages of FIIs.

  1. FIIs in the Indian Financial Market: An Overview

( Santosh et al ,2012) This study examines how foreign investors (FIIs) behave in the Indian stock market. FII investments in India have significantly increased. The study explores the relationship between FII flows and stock market returns. It uses daily data from 2000 to 2009. Researchers used statistical methods like regression and vector auto regression. The study found that FIIs tend to engage in positive feedback trading. This means they buy when the market is doing well and sell when it’s doing poorly. There is a two-way relationship between FII flows and stock market returns in India. The impact of FII activity on the market is strong but short-lived. The paper suggests that portfolio managers should actively adjust their strategies when dealing with companies that have high FII involvement, especially during times of market stress.

  1. The role of FIIs in Trading Volume

( Vijay Kumar et al ,2023) The study examines how Foreign Institutional Investors (FIIs) impact the Indian stock market and option prices. It finds that FIIs’ investment activities influence market volatility and can lead to option mispricing. Using data from 2012 to 2021, the study shows that FIIs’ trading behavior affects implied volatility, which determines option prices. The results suggest that FIIs have a strong impact on market movements, and their actions can create price fluctuations. The study recommends that investors and policymakers monitor FII activities to manage risks and ensure market stability.

  1. Influence on Short-Term and Long-Term Market Movements

(Ranjan Dasgupta, 2014) The study examines how Foreign Institutional Investors (FIIs) and Mutual Funds (MFs) impact the Indian stock market in both the short and long run. Using data from 2007 to 2012, it analyzes the relationship between FIIs, MFs, and the BSE SENSEX index. The study finds that FIIs play a significant role in driving stock market movements, while MFs have a smaller impact. The research uses statistical tests like correlation analysis, cointegration tests, and Granger causality tests to measure these effects. It concludes that there is no strong short-term relationship between FIIs, MFs, and stock market movements, suggesting inefficiencies in the Indian market. The study recommends further research considering global and domestic economic factors.

  1. Positive and Negative Influences on the Market

(Neha Gupta & Arya Kumar, 2020) The study examines the relationship between macroeconomic variables, investor sentiment, and stock market performance in India. Using data from 2009 to 2017, it analyzes how factors like inflation, exchange rates, foreign institutional investment (FII), crude oil prices, and gold prices impact stock indices (NSE 50, NSE 100, NSE 500). The findings reveal that FIIs and inflation positively influence stock prices, while crude oil prices, gold prices, exchange rates, and market volatility (VIX) have a negative impact. The study also confirms long-term relationships between these factors and stock prices, highlighting the need for policymakers to monitor these variables to ensure market stability.

  1. Implications for Investors and Policymakers

(Charumathi Balakrishnan & Habeebu Rahman, 2022) The study examines whether the United States bond yield affects foreign institutional investor (FII) inflows to India and the performance of the Indian stock market. Using monthly data from 2002 to 2021, the research applies the vector autoregressive (VAR) model and Granger causality test. The findings show that there is no short- or long-term relationship between US bond yields, FII inflows, and Indian stock market performance. This challenges the common belief that US monetary policy significantly impacts India’s financial markets. The study suggests that other factors, such as domestic institutional investors and foreign exchange rates, may play a bigger role in influencing India’s stock market.

  1. Relationship Between Currency and Market Investments

(A. Kotishwar, 2020) The study examines how currency fluctuations impact equity and debt markets, focusing on the rupee-dollar and euro exchange rates. Using data from 2008 to 2019, it finds that equity investments have a strong relationship with the rupee-dollar exchange rate, while the euro has a moderate effect on debt investments. The study applies statistical models like OLS, ARCH, and VAR to analyze the impact and predict future trends. Results suggest that currency fluctuations significantly affect market volatility and fund flows. The study recommends that investors closely monitor currency movements to make informed investment decisions.

  1. Influence of Foreign Institutional Investors on India’s Financial Markets

(Batra et al, 2023) Foreign Institutional Investors (FIIs) significantly influence India’s financial markets by bringing in foreign capital and enhancing liquidity. Factors such as the Sensex, stock market risk, exchange rates, gold prices, crude oil prices, and interest rates in India and the US impact FII inflows. A strong Sensex and stable economy attract FIIs, while high risk and currency fluctuations deter them. Rising crude oil prices and a depreciating rupee often reduce FII inflows. Increasing US interest rates can also divert funds away from India. Policymakers must monitor these factors to encourage stable investments. A stable financial environment is crucial for consistent foreign investments, which boosts India’s economic growth.

  • Overall Summary

Foreign Institutional Investors (FIIs) play a key role in India’s financial markets by influencing stock market movements, trading volume, and volatility. Studies show that FIIs follow positive feedback trading, buying when markets rise and selling when they fall. Their activities impact stock prices, option prices, and market stability. During the COVID-19 pandemic, FIIs drove market returns, while Domestic Institutional Investors (DIIs) helped reduce volatility. Corporate governance also affects foreign investment, with companies having large boards attracting more investors. Macroeconomic factors like inflation, exchange rates, crude oil prices, and US bond yields influence FII inflows. Currency fluctuations impact equity and debt markets, and policymakers must monitor these factors to ensure stable investments.

References

A. Kotishwar, 2020. “The Impact of Currency Fluctuations on Equity and Debt Market,” International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 392-406.

Batra, Gunjan & Suppiah, Nithiyananthan & Dembla, Pamila & Kumar, Nand, 2023. “Investigation of Foreign Institutional Investors (FIIs) in India,” Journal of Internet Banking and Commerce, , vol. 28(04), pages 01-12, July.

Charumathi Balakrishnan & Habeebu Rahman, 2022. “Does the United States Bond Yield Affect Foreign Institutional Investor Inflows to India and Indian Stock Market?,” Asian Economics Letters, Asia-Pacific Applied Economics Association, vol. 3(4), pages 1-7.

Neha GUPTA & Arya KUMAR, 2020. “Macroeconomic variables and market expectations: Indian Stock Market,” Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(624), A), pages 161-178, Autumn.

Nikunj Patel & Aakruti Patel & Bhavesh Patel, 2024. “The Role of Institutional Investors in The Indian Stock Markets During the Pandemic,” Capital Markets Review, Malaysian Finance Association, vol. 32(1), pages 75-99.

Panicker, Vidya & Mitra, Sumit & Sensarma, Rudra, 2016. “Corporate Governance Determinants of FII in Indian IT Firms,” MPRA Paper 81068, University Library of Munich, Germany.

Ranjan Dasgupta, 2014. “Driving Role of Institutional Investors in the Indian Stock Market in Short and Long-Run – An Empirical Study,” International Journal of Business, Economics and Management, Conscientia Beam, vol. 1(6), pages 72-87.

Santosh Kumar & Tavishi & Raju G & Ashish Khatua, 2012. “Behavioral Modeling Of Foreign Institutional Investor’S In Indian Equity Market,” Global Journal of Business Research, The Institute for Business and Finance Research, vol. 6(1), pages 1-8.

Suresh Kumar & Jasdeep Dhami, 2014. “Impact Of Foreign Institutional Investment On The Volatility Of Indian Stock Market,” Journal of Academic Research in Economics, Spiru Haret University, Faculty of Accounting and Financial Management Constanta, vol. 6(1 (March)), pages 32-44.

Vijay Kumar Sharma & Satinder Bhatia & Hiranmoy Roy, 2023. “Investment Behavior of Foreign Institutional Investors and Implied Volatility Dynamics: An Empirical Study on the Indian Equity Derivatives Market,” JRFM, MDPI, vol. 16(11), pages 1-14, November.

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