Indian Evidence: Impact of Foreign Institutional Investments on Stock Market

National Stock replace is one of the stock market which acts as a key place in the transmission of currency where high volatility is maintained. From the data observed in past few years shows clear confirmation that there is a huge investment going into these stock markets through various sources and the number of companies listed in the National stock exchange has also improved considerably. In 1992 government liberalized foreign investment into the Indian market and there was a huge inflow of foreign currency into the Indian market. This paper is done to study the relation among the stock index progress in the National stock exchange and the FII flow into Indian markets. Hence, in this age of transnational capitalism, an important amount of capital is flowing from developed world to promising economies. Positive fundamentals collective with fast increasing markets have made India an attractive destination for foreign institutional investors (FIIs). Although the Foreign institutional investors (FIIs), whose investments are frequently called 'hot money' because they can be pulled out at any time, have been blamed for large and concerted removal of capital from the nation at the time of new financial crisis, they have emerged as significant players in the Indian capital market.

While looking at literatures presented it was found that most of the developing countries opened up their economies by dismantling capital controls with a view to attracting foreign capital, complement it with domestic capital in the early 1990’s. (Kumar, Sundaram (2009)). One of the research studies on the relation between the foreign institutional investment and the impartiality profits in India indicates that impartiality profits in India reasons FII flows and there is a important volatility clustering in FII investments and NIFTY series but there is no transmission or destabilizing effect. (Dr.Ambuja Gupta (2011), Braj Kishore 2012). The other research study states that there is no long- run stability relationship among stock returns and exchange rate. ( Lean,Narayan and Smyth, 2006). Another research study indicates that the increasing participation of FII in Indian stock market had manipulated on every other however their timing of influence is dissimilar. (Takeshi Inoue, November 2008). (Aggarwal, R., Klapper, L. & Wysocki, P. D. 2005) investigated the impact of foreign institutional investment on the performance of emerging market firms and found that there is positive effect of foreign 2003) observed that foreign investors preferred the companies with better corporate governance. (Covirg, Ng. L. K. And Vicentiu Lau Sie Ting 2007) found causation running from FII inflows to return in BSE. They observed that FIIs act as market makers and book profits by investing when prices are low and selling when they are high. Hence, there are contradictory findings by various researchers regarding the causal relationship among FII net inflows and stock market capitalization and profits of BSE/ NSE. Therefore, there is a require to investigate whether FIIs are the cause or effect of stock market fluctuations in India. (Mehra Saniya 2007) found that foreign investors tend to avoid stocks with high cross corporate holdings. They suggested that FII are likely to be efficient processors of public information and are attracted to Japanese firms with low information irregularity. (Morin, 2000) explored the influence of French model of shareholding and management on FII. They commented that France has undergone rapid change from a financial network economy to a financial market economy. The new pattern has broken the conventional system of cross holding and facilitates the arrival of FII who bring with them new method and demands efficient corporate management. There is a increasing literature on the determinants of global investment flows and allocations. (Mehra Saniya 2007) analyzed foreign ownership and firm characteristics for the Swedish market. They found that foreigners have greater presence in large firms, firms paying low dividends and in firms with large cash holdings. They explained that firm size is driven by liquidity. They measured international presence by foreign listings and export sales. They reiterated that foreigners tend to underweight the firms with a dominant owner. (Mehra Saniya 2007) concluded that foreign fund managers have less information about the domestic stocks than the domestic fund managers. They found that ownership by foreign funds is related to size of foreign sales, index memberships and stocks with foreign listing.

The objective of this study is to find out the significant relation between the FII and the Indian stock market (NSE).

This study is done to measure the significant impact of FII in Indian stock market. This study is done to measure the relationship between FII and the stock index of Indian market.

includes BSE SENSEX and the FIIs and the secondary data was collected through the official Stock Exchange. For calculation, daily BSE SENSEX data was taken and complete change was calculated. On the same data, percentage change was calculated. The measure of percentage change provides a improved picture of the development over the complete change as it is expressed as a comparison to the size of one or together of them. Such measures are often used as more genuine indicators for repeated measurements where the outcomes are expected to be the same. It is a way to articulate a change in a variable compared to its starting value. The data has been collected for the past 10 years from the above sources that are from 1993-2014 and the following test has been performed to find out the impact of FII in Indian stock market. Chi square test has been performed with 5% significance level with the assumption of null hypothesis as there is a significant relation between the FII and the stock market in India. The correlation between FII and the stock index in India for the past 10 years has also been measured to find out the impact of FII in Indian stock market.

The analysis has been started by taking the past 10 years closing index of NIFTY and the FII into India that is from the year 1993 to 2013 to understand the correlation between the stock market changes in relation to the FII. From the above data in table 1 the correlation between the closing stock index of every year end of NSE and the corresponding FII of those years was calculated and it was found that the relation between them is 0.7859 which indicates that there is very high correlation between the FII inflows and the stock index of the Indian market.

in the year 2013 and the corresponding FII inflow into the Indian market.

From the above data in table 2 for the year 2013 the correlation between the closing stock index of every month of NSE and the corresponding FII of those years was calculated and it was found that the relation between them is 0.44811 which indicates that there is a significant correlation between the FII inflows and the stock index of the Indian market. Further analysis was made to find out in depth the correlation between the Indian stock market and the FII inflow for 13 days in the month of March 2014.

From the above data in table 3 for the month March 2014 the correlation between the closing stock index of every month of NSE and the corresponding FII of those years was calculated and it was found that the relation between them is 0.04667 which indicates that there is a poor correlation between the FII inflows and the stock index of the Indian market.

Based on the findings from the table it can be concluded that there is a high correlation between FII flow and the raise in the index of Indian stock market in a longer span but there is a very less impact in the short span that is the correlation between FII flow and the corresponding raise in the index of Indian stock hypothesis was assumed as-“ There is relation between FII and the stock index of Indian market “and it was found that null hypothesis was validated. Thus it is found that FII has a significant impact on Indian stock market.

Aggarwal, R., Klapper, L. & Wysocki, P. D. (2005). “Portfolio preferences of foreign institutional investors”, Journal of Banking and Finance, Vol. 29, No. 12, pp. 2919-2946. Bhanumurthy, N.R. and Rai, K. (2003). “Determinants of Foreign Institutional Investment In India : The Role of Return, Risk and Inflation”, JEL Classification : E44, G15, G11. Braj Kishore (2012). Net FII flows into India: A cause and effect study ASCI Journal of Management 41(2): pp. 107-120 Covirg, Ng. L. K. And Vicentiu Lau Sie Ting (2007). “Do domestic and foreign fund managers have similar preferences for stock characteristics ? A cross country analysis”, Journal of International Business Studies, Forth coming Issue. Dr. Ambuja Gupta (2011). Does the stock market raise or fall due to FII’s in India? International Refereed Research Journal –Vol- 2 (pp. 2231-4172) Kumar, Sundaram (2009). Investigating causal relationship between stock return with respect to exchange rate and FII: evidence from India MPRA (15793) Lean, Narayan and Smyth, (2006). “Exchange rate and Stock price interaction in major Asian markets: evidence for individual countries and panels allowing for structural breaks”, Business and Economics, Monash University

Takeshi Inoue, November (2008). "The causal relationships in mean and variance between stock returns and Foreign institutional investment in India", IDE discussion paper no.180