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 formsFDI 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, its 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

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

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 FIIs are becoming more 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).

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 days/months 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

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

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

Pearson Correlation

Nifty

FII

1.000

.510

.510

1.000

.038

.038

Nifty

13

13

FII

13

13

Nifty

FII

Sig. (1-tailed)

Nifty

FII

Regression analysis between FII and Nifty:

Regression has been used to determine the strength of relationship between FII and Nifty. Rsquare 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
df

Mean Square

Sig.

10426905.668

3.859

.075(a)

11

2702123.029

Squares

Regression

10426905.
668

Residual

29723353.
316

Total

40150258.
12
984

Model Summary:

Model

.510(a)

R Square

.260

Adjusted R

Std. Error of

Square

the Estimate

.192

1643.813563

Coefficients:
standardized
Un-standardized coefficients
coefficients

(Constant)

FII

Std. error

2702.553

625.188

.017

.009

Mean square

.510

Sig.

4.323

.001

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.

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. 29192946.
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.rbi.ord.in>,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.