A Research Paper by Mayur Shah

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Flows of FIIs and Indian Stock Market

Dr. Mayur Shah

An Abstract

Capital is considered to be very important growth in any economy. In case of developing

country like India Domestic capital is not sufficient to fulfil the requirement of economy. In

that case foreign capital plays a very important role. Foreign Capital comes in two forms-

FDI and FII. FDI is considered as a more stable form of foreign capital as compared to FII.

But, FII inflows and outflows directly create impact on stock market. Hence FIIs have

emerged as movers and shakers of Indian Stock Market. This paper examines the trend and

pattern of FII flow in India and also examines the relationship between FII and Nifty.

Introduction:

The Foreign Institutional Investors (FIIs) have emerged as remarkable players in the Indian

stock market and their growing contribution adds as an important feature of the development

of stock markets in India. As a result, the Indian Stock Markets have reached new heights and

became more volatile making the researches work in this dimension of establishing the link

between FIIs and Stock Market volatility. Hence, it‟s an interesting topic to ascertain the role

of FIIs in Indian Stock Market.

After the launch of the reforms, foreign institutional investors (FIIs) from September 14,

1992, with suitable restrictions, were permitted to invest in all securities traded on the

primary and secondary markets, including shares, debentures and warrants issued by

companies which were listed or were to be listed on the Stock Exchanges in India and in

schemes floated by domestic mutual funds. A positive contribution of the FIIs has been their


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role in improving the stock market infrastructure and the SEBI assured its contribution

towards its development.

Hence, in this age of transnational capitalism, a significant amount of capital is flowing from

developed world to emerging economies. Positive fundamentals combined with fast growing

markets have made India an attractive destination for foreign institutional investors (FIIs).

Although the Foreign institutional investors (FIIs), whose investments are often called 'hot

money' because they can be pulled out at anytime, have been blamed for large and concerted

withdrawals of capital from the country at the time of recent financial crisis, they have

emerged as important players in the Indian capital market.

Review of Literature

Douma, Kabir and Rejie (2006) investigated the impact of foreign institutional investment on

the performance of emerging market firms and found that there is positive effect of foreign

ownership on firm performance. They also found impact of foreign investment on the

business group affiliation of firms. (Aggarwal, Klapper and Wysocki, 2005) observed that

foreign investors preferred the companies with better corporate governance.

Mukherjee (2002) examined the various probable determinants of FII and concluded (1)

Foreign investment flows to the Indian markets tend to be caused by return in the domestic

equity market; (2) returns in the Indian equity market is an important factor that has an

impact on FII flows; (3) whereas FII sale and FII net inflow are significantly affected by the

performance of the Indian equity market, FII purchase show no such affect to this market

performance; (4) FII investors do not probably use Indian equity market for the purpose of


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diversification of their investment; (5) returns from the exchange rate variation and the

fundamentals of the economy may have an impact on FII decisions, but such influence do not

prove to be strong enough.

Gordon and Gupta, (2003) 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 between FII net inflows and stock market capitalization and

returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs are the cause or

effect of stock market fluctuations in India.

Rajesh Chakraborty(2001) in his research paper titled „ FII Flows to India: Nature and

Causes‘ concluded that since the beginning of liberalization FII flows to India have steadily

grown in importance. The author analysed these flows and their relationship with other

variables Pal, P. (2004) found that FIIs are the major players in the Indian stock market and

their impact on the domestic market is increasing. Trading activities of FIIs and the domestic

stock market turnover indicates that FII‟s are becoming mor e important at the margin as an

increasingly higher share of stock market turnover is accounted for by FII trading in India.

Objectives of Study:

a) To study the trends and patterns of foreign capital flow into India in the form of FII

b) To study the relation and impact of Foreign Institutional Investment (FII) on Indian

stock market (Nifty).


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Scope of Study:

The study takes 13 years data into consideration. To study the impact of FII on Indian stock

market, Nifty was selected in the study, as it is the most systematic stock market indices and

widely used by market participants for benchmarking.

Research Methodology:

Data Collection: This study is based on secondary data. The required data related to FII have

been collected from various sources i.e. Bulletins of Reserve Bank of India, publications from

Ministry of Commerce, SEBI Handbook of Statistics, Govt. of India. CNX Nifty data is down

loaded from the websites of NSE. Daily closing index value are taken and averaged to get the

index value for each year, which is considered as more representative figure of index for the

entire year rather any one day‟s/month‟s closing figure of the index. The current study

considers 13years data starting from 2001 to 2013.

Analytical tools and technique: In order to analyze the collected data the statistical tools

such as correlation and egression is used. Correlation coefficient is a statistical measure that

determines the degree to which two variable's movements are associated. Correlation

coefficient value ranges from -1 to 1. Negative value of correlation indicates: if one variable

increases in its values, the other variable decreases in its value and positive value indicates: if

one variable increases in its values the other variable also increases in its value. In the current

study to study the linear relationship between variables such as FII and Nifty correlation is

applied. The regression analysis is a statistical technique used to evaluate the effects of


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independent variables on a single dependent variable. In the current paper attempt is made to

study the impact of FII on Nifty.

Hypothesis:

(1) H0: There is no significant relation between FII and CNX Nifty

(2) H0: There is no Significant impact of FII on CNX Nifty

Data Analysis:

The following table gives the Net purchases by FII in Indian stock market from year 2001 to

2013. It also gives Average value of closing value of Nifty from 2001 to 2013.

It shows that Net flow of FII has considerably increased from year 2001 to year 2013 with

certain declining values in certain years. CNX nifty has also increased from the 2001 to 2013.

Flow of FII and CNX Nify data

Year Net FII (Cr.) CNX Nifty

2001 13128.20 1117.5

2002 3629.60 1045.5

2003 30459 1264

2004 38965.80 1750.25

2005 47181.90 2297.10

2006 36540.20 3420.475

2007 71486.30 4680.6

2008 -52987.40 4198.8

2009 83424.20 4183

2010 133266.80 5462

2011 -2714.20 5319.93

2012 128360.70 5410.5


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2013 112968.70 5908

Source: SEBI Handbook of Statistics

Correlation between FII and Nifty

Correlation has been used to determine the statistical relationship between variables under

study FII and CNX nifty. Based on the results it can be concluded that there is a moderate

positive correlation of 0.510 between FII and Nifty. Since the significance value is 0.038

which is less than 0.05, we should reject the null hypothesis. There is a relation between FII

and Nifty.

Correlations

Nifty FII

Pearson Correlation Nifty 1.000 .510

FII .510 1.000

Sig. (1-tailed) Nifty . .038

FII .038 .

N Nifty 13 13

FII 13 13


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Regression analysis between FII and Nifty:

Regression has been used to determine the strength of relationship between FII and Nifty. R-

square value is 26% which means model explains the 26% variation. In other words

independent variable FII is able to explain 26% variation of the dependent variable Nifty. p

value is 0.075 which is more than 0.05 which means null hypothesis is accepted and there is

no significant impact of FII on Nifty.

ANOVA:

Sum of

Squaresdf Mean Square F Sig.

1 Regression 10426905.

6681 10426905.668 3.859 .075(a)

Residual 29723353.

316

11 2702123.029

Total 40150258.

98412

Model Summary:

Model R R Square

Adjusted R

Square

Std. Error of

the Estimate

1 .510(a) .260 .192 1643.813563


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Coefficients:

Un-standardized coefficientsstandardized

coefficients

B Std. error Mean square t Sig.

1 (Constant) 2702.553 625.188 4.323 .001

FII .017 .009 .510 1.964 .075

Findings of the study:

FII flows in terms of net purchases have shown increasing trend from the year 2001 to

year 2013.

CNX nifty has increased over a period of 13 years from year 2001 to year 2013.

There is a moderate positive correlation between FII and CNX nifty stock market

index. There is a relation between FII and Nifty.

FII is able to explain 26% variation of the dependent variable Nifty

There is no significant impact of FII on market index nifty.

Conclusion:

The Flow of FII has advanced significantly in last 13 years from the year 2001 to year 2013

and there is a correlation between such FII flows and changes in stock market indices like

nifty. R-square is also found to be very low means other factors might be contributing

towards volatility of Indian stock market. As the correlation is not found to be strong some

other factors can have impact and relations with stock market which requires further

investigation and application of other statistical models to look into this research.


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REFERENCES

1) Douma, S., Kabir, R. and Rejie, G. (2006). “Foreign and domestic ownership,

business groups and firm performance-Evidence from large emerging market”,

Strategic Management Journal, Vol. 27, No. 7, pp. 637-657.

2) 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.

3) Gordon, J. and Gupta, P. (2003). “Portfolio Flows into India : Do Domestic

Fundamentals Matter?” IMF Working Paper, Number WP/03/02.

4) Chakrabarti, R. (2001). “FII Flows to India : Nature and Causes”, Money and

Finance, Vol. 2, No. 7.

5) Mukherjee (2002) “Taking Stock of Foreign Institutional Investors.” Economic and

Political Weekly. June 11, 2005. ,www.sebi.gov.in

6) Pal, P. (2004),” Foreign Institutional Investment in India”, Research on Indian Stock

Volatility. Vol 12. Publisher: Emerald Group Publishing Limited.

A Research Paper by Mayur Shah

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