A

PROJECT REPORT ON

ANALYTICAL STUDY OF IMPACT OF FOREIGN INSTITUTIONAL INVESTORS (FIIS) ON EXCHANGE RATE AND VALUE OF INDIAN NATIONAL RUPEE (INR) IN TERMS OF VOLATILITY
Submitted To Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur In Partial Fulfilment of the Academic Requirements for the Award of the Degree Of

MASTER OF BUSINESS ADMINISTRATION Specialization

FINANCIAL MANAGEMENT
SUBMITTED BY

Mr. JAYANTKUMAR C. KUMBHARE Guided by Dr. A. A. Paturkar

Backward Class Youth Relief Committee

UMRER COLLEGE OF ENGINEERING, UMRER,
NAGPUR-441204. [M.S.]

For The Academic Year 20010-2011

B.C.Y.R.C.s UMRER COLLEGE OF ENGINEERING, UMRER DEPARTMENT OF M.B.A.

CERTIFICATE
Certified that the project report entitled Analytical Study of Impact of Foreign Institutional Investors (FIIs) On Exchange Rate and Value of Indian National Rupee (INR) In Terms Of Volatility is a bonafide work done under my guidance, by

Mr. Jayantkumar C. Kumbhare

and is submitted to Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur in partial fulfillment of the requirements for the award of degree of Master of Business Administration during the session 2010-11.

Dr. A. A. Paturkar,
[Project Guide], Professor, Dr. Ambedkar College, Nagpur.

Prof. Amit Bankar,

Co-ordinator, M.B.A. Deptt. U.C.O.E., Umrer, Dist:-Nagpur

Dr. A. C. Waghmare Principal, U.C.O.E., Umrer

Dist.-Nagpur

ACKNOWLEDGEMENT

I take this opportunity with a great pleasure to express our sincere regards and deep sense of gratitude to our guide Dr. A. A. Paturkar, Professor, Dr. Ambedkar College, Nagpur for his valuable guidance, practical suggestions and encouragement to bring about the completion of project. It is through his proficient knowledge, valuable guidance and support that this project report has been set right. I am also thankful to all faculty of M.B.A. Department of U.C.O.E., Umrer who have always co-operated while carrying out the project work. I also express gratitude towards Prof. Amit Bankar, Co-ordinator,Dept.of M.B.A., and Dr. Atul C. Waghmare, Principal U.C.O.E., Umrer for their encouragement and timely suggestions. Finally, I would like to thank our well wishers, critics who helped directly or indirectly in the completion of this work.

Mr. Jayantkumar C. Kumbhare

DECLARATION

I hereby declare that the project entitled Analytical Study of Impact of Foreign Institutional Investors (FIIs) On Exchange Rate and Value of Indian National Rupee (INR) In Terms Of Volatility is a bonafide record of work done by me under supervision of Dr. A. A. Paturkar.

The project is entirely original and has not been submitted to any university for the award of any degree, diploma or any other similar title.

Place: Umrer Date: / / 2011

Mr. Jayantkumar C. Kumbhare

INDEX
Chapter No. 1 Particulars Page No.

Executive Summary Introduction

2.1. Introduction of Topic 2.2. Introduction of FII 2.3. What is Indian National Rupee [INR]? 2.4. Introduction of Exchange market of India 2.5 Introduction of Volatility

Objective of the Study Scope & Need of Study Research Methodology

5.1. Problem Definition

5.2. Research Design 5.3. Data Collection

6 7 8 9 10 11 12

Hypothesis Data Tabulation Data Interpretation and Analysis Hypothesis Testing Conclusion Limitation Bibliography

Chapter No.1

EXECUTIVE SUMMARY

Executive Summary

The project topic is on Analytical Study of Impact of Foreign Institutional Investors (FIIs) On Exchange Rate and Value of Indian National Rupee (INR) In Terms Of Volatility. This project has covered introduction about Foreign Institutional Investors (FIIs), Indian National Rupee (INR) & Exchange market of India. The main objective of this study is to analyze the impact of the investment made by FIIs on exchange rate of Indian rupee. The study reflects that the scope and trading mechanism of foreign institutional investors in India. The study explain that find out the relationship between the FIIs equity investment pattern and Exchange rates. The study analysis that the impact of foreign institutional investors on exchange rate and value of Indian national rupee in terms of volatility. The effectiveness of the volatility of the exchange rate denote that the up and down in the exchange rate due to fluctuation of the FIIs. Under the study, various role and function of foreign institutional investors in the Indian capital market on exchange rates and value of Indian national rupee in terms of volatility. The study also reveals the volatility of the exchange rate is an unavoidable situation which is bound to happen over a period of time. Finally, the project has been concluded that the of FII net inflow has shown the positive correlation with the exchange rate. That means when the FII net inflow done then appreciate the rupee value and the exchange rate increased and vice versa. On the other hand, the net FII inflow/outflow has been increased the volatility of exchange rate. It proves that standard deviation of exchange rate before and after FII inflow/outflow. In this analysis standard deviation more after the FII investment started in India. Volatility of the exchange rate denote to the ups and down in the exchange rate due to fluctuation of the FIIs.

Chapter No.2

Introduction

2.1: Introduction of Topic

In this project we will try to understand the concept of the Foreign Institutional Investment (FII) and their role and effect on the exchange rate of Indian Rupee means the fluctuation in FII investment affects the value of exchange rate or not. In order to understand the role and effect of the FII on Indian Rupee we need to know in brief about the Foreign Institutional Investment and Exchange Rate of Indian National Rupee.

2.2: FII (Foreign Institutional Investors)

Foreign institutional investor means an entity established or incorporated outside India for the purpose of making investments into the Indian securities market under the regulations prescribed by SEBI. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors. FII include Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. FIIs can invest their own funds as well as invest on behalf of their overseas clients registered as such with SEBI. These client accounts that the FII manages are known as sub-accounts. A domestic portfolio manager can also register itself as an FII to manage the funds of sub-accounts.

Foreign Institutional Investors (FIIs) are entities established or incorporated outside India and make proposals for investments in India. These investment proposals by the FIIs are made on behalf of sub accounts, which may include foreign corporate, individuals, and funds etc. In order to act as a banker to the FIIs, the RBI has designated banks that are authorized to deal with them. The biggest source through which FIIs invest is the issuance of participatory Notes (P-Notes), which are also known as offshore Derivatives. Foreign Investment refers to investments made by residents of a country in financial assets and production process of another country. After the opening up of the

borders for capital movement these investments have grown in leaps and bounds. But it had varied effects across the countries. It can affect the factor productivity of the recipient country and can also affect the balance of payments[BOP]. In developing countries there was a great need of foreign capital, not only to increase their productivity of labour, but also helps to build the foreign exchange reserves to meet the trade deficit. Foreign investment provides a channel through which these countries can have access to foreign capital. It can come in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Foreign Direct Investment [FDI] involves in the direct production activity and also of medium to long-term nature. But the Foreign Portfolio Investment[FPI] is a short-term investment mostly in the financial markets and it consists of Foreign Institutional Investment (FII). The FII, given its short-term nature, might have bidirectional causation with the returns of other domestic financial markets like money market, stock market, foreign exchange market etc. Hence, understanding the determinants of FII is very important for any emerging economy as it would have larger impact on the domestic financial markets in the short run and real impact in the long run. The present study examines the determinants of foreign portfolio investment in the Indian context as the country after experiencing the foreign exchange crisis opened up the economy for foreign capital. India, being a capital scarce country, has taken lot of measures to attract foreign investment since the beginning of reforms in 1991. Till the end of January 2003 it could attract a total foreign investment of around US$ 48 billions out of which US$ 23 billions is in the form of FPI. FII consists of around US$ 12 billions in the total foreign investments. This shows the importance of FII in the overall foreign investment programme. As India is in the process of liberalizing the capital account, it would have significant impact on the foreign investment and particularly on the FII, as this would affect short-term stability in the financial markets. Hence, there is a need to determine the push and pull factors behind any change in the FII, so that we can frame our policies to influence the variables which drive-in foreign investment. Also FII has been subject of intense discussion, as it is held responsible for intensifying currency crisis in 1990s elsewhere. The present study would examine the determinants of FII in Indian context. Here we make an attempt to analyze the effect of return, risk and inflation, which are traced to be major determinants in the literature on FII. The proposed relation (discussed in detail later) is that inflation and risk in domestic country and return in foreign country would adversely affect the FII flowing to domestic country, where as inflation and risk in foreign country and return in domestic country would have favorable affect on the same. In the next section we would briefly discuss the existing studies. In section 3, we discuss the theoretical model. Section 4 briefly discusses the trends in FII in India. Database and methodology adopted in this study are discussed in Section 5. In section 6, we discuss the estimated results and conclusions are drawn accordingly in the last section.

Entry Option for FIIS

A foreign company planning to set up business operations in India has the following options:

1. Incorporated Entity
By incorporating a company under the Companies Act,1956 through Joint Ventures; or Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.

2. Important terms to know about FIIs:

Sub-account : Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII. Designated Bank: Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII. Domestic Custodian: Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities. Broad Based Fund: Broad Based Fund means a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund. Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to have twenty investors. If the fund has an institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund.

3. Unincorporated Entity
As a foreign Company through Liaison Office/Representative Office Project Office Branch Office

4. FOREIGN INSTITUTIONAL INVESTORS REGISTRATION

Following entities / funds are eligible to get registered as FII: Pension Funds Mutual Funds Investment Trust Insurance or reinsurance companies Investment Trusts Banks Endowments University Funds Foundations Charitable Trusts or Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders.

FIIs can invest in the stocks and debentures of the Indian companies. In order to invest in the primary and secondary capital markets in India, they have to venture through the portfolio investment scheme (PIS). According to RBI regulations, the ceiling for overall investment of FIIs is 24% of the paid up capital of the Indian company. The limit is 20% of the paid up capital in the case of public sector banks. However, if the board and the general body approve and pass a special resolutions, then the ceiling of 24% for FII investment can be raised up to sectoral cap for that particular segment. In fact, recently SEBI allowed FIIs to invest in unlisted exchanges as well, which means both BSE and NSE (the unlisted bourses) can now allot shares to FIIs also.

Parameters on which SEBI decides FII applicants eligibility

As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfill the following conditions to qualify for grant of registration: Applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. The applicant should be regulated by an appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor. The applicant is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India. Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment. The applicant must be a "fit and proper" person.

The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also has to appoint a designated bank to route its transactions. Payment of registration fee of US $ 5,000.00 "Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying for FII registration.

Supporting documents required are:

Application in Form A duly signed by the authorized signatory of the applicant.

Certified copy of the relevant clauses or articles of the Memorandum and Articles of Association or the agreement authorizing the applicant to invest on behalf of its clients Audited financial statements and annual reports for the last one year , provided that the period covered shall not be less than twelve months. A declaration by the applicant with registration number and other particulars in support of its registration or regulation by a Securities Commission or Self Regulatory Organisation or any other appropriate regulatory authority with whom the applicant is registered in its home country. A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian together with particulatrs of the domestic custodian. A signed declaration statement that appears at the end of the Form. Declaration regarding fit & proper entity.

The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in favour of "Securities and Exchange Board of India" payable at New York.

SEBI generally takes 7 working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI. In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI. The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed. Same as initial registration, Along with "Form A" and all the relevant documents, the applicants are required to fill in additional form (Annexure 1) while applying for renewal. US $ 5,000 needs to be paid for renewal of FII registration. The application for renewal should be submitted three months before expiry of the FII registration. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for registration of FII/sub-account, under 100% debt route is similar to that of normal funds besides a clear statement by the applicant that it wishes to be registered as FII/sub-account under 100% debt route.

The FII registration application should be sent to:

Securities and Exchange Board of India Division of FII & Custodian Mittal Court "B" Wing, First Floor 224, Nariman Point Mumbai 400 021 India.

SUB-ACCOUNT REGISTRATION
Institution or funds or portfolios established outside India, whether incorporated or not. Proprietary fund of FII. Foreign Corporates Foreign Individuals. The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required to sign the Sub-account application form. "Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-account registration. No document is needed to be sent with annexure B. The fee for sub-account registration is US$ 1,000. The fee is to be submitted at the time of submitting the application. The mode of payment is Demand Draft in the name of "Securities and Exchange Board of India" payable at New York. SEBI generally takes three working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, three days shall be counted from the days when all necessary information sought, reaches SEBI. The validity of sub-account registration is co-terminus with the FII registration under which it is registered. The process of renewal of sub-account is same as initial registration. Renewal fee in this case is US $ 1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.

POST-REGISTRATION PROCESSES:
If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI about the change. It should also mention the reasons for the name change and give an undertaking that there has been no change in beneficiary ownership. In case of name change of FII, the request should be accompanied with documents from home regulator and registrar of the company evidencing approval of name change, and the original FII registration certificate issued by SEBI should be sent back for necessary amendment. Procedure for transferring a sub-account from one FII to another: The FII to whom the Sub-account is proposed to be transferred has to send a request along with a declaration that it is authorized to invest on behalf of the Sub-account. The transferor FII should also submit a No-objection certificate. The FII should send a request, along with no-objection certificate from existing domestic custodian, for change in domestic custodian. The FII would be required to send a request for cancellation of its registration or registration of its Sub-account/s clearly mentioning the name and registration number of the entity. The FII should ensure that it / Sub-account has nil cash / securities holdings. Procedure for change of local custodian: In case of change of the local custodian of the FII / sub-account, the change should be intimated to SEBI by the FII. On receipt of no objection from the existing custodian and acceptance from the proposed custodian, the change of custodian would be approved - by SEBI. Procedure for registration as FII/sub account under 100% debt route: The procedure for registration of FII/sub account under 100% debt route is similar to that of normal funds besides a clear statement by the applicant that it wishes to be registered as FII/sub account under 100% debt route. However, Government of India allocates the overall investment limit for 100% debt funds annually. The grant of investment limit for individual 100% debt funds is within this overall limit. The funds have to seek further investment limit in case the limit allotted to them is exhausted and they wish to invest further. A Foreign Institutional Investor having an account with one custodian can open accounts with different custodians for its different sub-accounts. However, one sub-account cannot be custodial with more than one custodian. Procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor: In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor, then it will have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteria norms mentioned in SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit a letter from the old FII indicating its 'Noobjection' to such registration. Procedure for renewal of FII/Sub-Account registration: They have to apply before 3 months of the expiry of registration in Form A. Circular No FITTC/CUST/09/2000 dated September 21, 2000 may be referred.

If the FII does not renew its/sub-accounts registration: The registration of the FII / Sub-account would get expired at due date and it would not be allowed to trade in Indian securities markets. If it is not interested in renewal but has certain residual assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abides by the guidelines specified in this regard.

Scope of Investments under the Portfolio Investment Scheme.

FIIs, under the Portfolio Investment Scheme, are permitted to make both primary and secondary investments in the Indian capital markets. Unlike an investor which relies solely on FDI regulations, a foreign investor which registers as a FII would be allowed to buy and sell securities over Indian stock exchanges. In addition, FIIs are entitled to effect transactions in a broader category of securities than an investor relying on FDI regulations alone. FIIs are permitted to purchase equity securities (both listed and unlisted), units of schemes floated by the Unit Trust of India and other domestic municipal funds, warrants, debentures, bonds, governmental securities and derivative instruments which are traded on a recognized stock exchange. There is no limit on the amount that FIIs may invest in the Indian market, and no lock-up periods apply to investments made by FIIs.

Exchange Controls
FIIs are required to open up one or more bank accounts with certain designated banks and must also appoint a domestic custodian for custody of investment made by the FII. Through the designated accounts, FIIs are authorized to freely transfer funds from foreign currency accounts to Rupee accounts and vice versa; make Rupee denominated investments in Indian companies; freely transfer after-tax proceeds from Rupee accounts to foreign currency accounts, and repatriate capital, capital gain, dividends interest income and other gains, subject to deduction for applicable withholding taxes. So long as FIIs execute purchases and sales on a recognized Indian stock exchange, they are not required to obtain transaction specific approval from the Reserve Bank. FIIs are also entitled to effect transactions using their own proprietary funds, or the funds of their sub accounts.

Investment Restrictions.
Certain limitations apply to investments by FIIs into India. First, FIIs and their subaccounts investment in an Indian company can not exceed ten percent (10%) of the total issued share capital of the Indian company (five percent if the subaccount is a foreign corporation or individual). In addition, the aggregate investment of all FIIs in an Indian company may not exceed twenty four percent (24%) of its total issued share capital, without the express approval of its board of directors and shareholders. Even with board

of director and shareholder approval, the same sectoral limits which apply to foreign direct investment would continue to apply. FIIs may register with SEBI as a debt fund or an equity fund. FIIs which are registered as equity funds, are required to invest at least seventy percent (70%) of their funds in equity and equity-related securities. A FII registered as a debt fund, on the other hand, must invest one hundred percent (100%) of its funds in debt instruments. Foreign corporations and individuals are not eligible subaccounts of a FII that is registered as a debt fund. FIIs are not permitted to engage in short selling, other than in respect of derivative securities traded over a recognized exchange, and must effect transactions through a registered stock broker. Sector investment prohibitions and caps which apply to foreign direct investment also apply to investments by FIIs, and FII investments must also comply with the pricing requirements applicable to foreign direct investment. In addition, FIIs are not permitted to invest in print media.

Trend of FIIs with the help of economic figures:

In 2004, FII investments crossed $9 billion, the highest in the history of Indian capital markets. The total net investment for the year up to December 29 stood at US$9,072 million while foreign investors pumped in about US$2,113 million in December. Korea and Taiwan have always been the biggest recipients of FII money. It was only in 2004 that India managed to receive the second highest FII inflow at over $8.5bn. In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities. On 9th March 2009, India's exceptional growth story and its booming economy have made the country a favourite destination with foreign institutional investors (FIIs). It has continued to attract investment despite the Satyam non-governance issue and the global economic contagion impact on Indian markets. According to Mr Gautam Chand, CEO of Instanex, said FIIs are the largest institutional investors in India with holdings valued at over US$ 751.14 billion as on December 31, 2008. They are also the most successful portfolio investors in India with 102 per cent appreciation since September 30, 2003. As per SEBI, number of registered FIIs stood at 1626 and number of registered sub-accounts stood at 4972 as on March 17, 2009. Future Prospects of Foreign Institutional Investments:

 Sustaining the growth momentum and achieving an annual average growth of 910% in the next five years. Simplifying procedures and relaxing entry barriers for business activities and Providing investor friendly laws and tax system. Checking the growth of population; India is the second highest populated country in the world after China. However in terms of density India exceeds China, as India's land area is almost half of China's total land. Due to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (World Bank figures). Boosting agricultural growth through diversification and development of agro processing. Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year. Developing world-class infrastructure for sustaining growth in all the of the economy Allowing foreign investment in more areas. sectors

Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management. Global corporations are responsible for global warming, the depletion of natural resources, and the production of harmful chemicals and the destruction of organic agriculture. The government should reduce its budget deficit through proper pricing mechanisms and better direction of subsidies. It should develop infrastructure with what Finance Minister P Chidambaram International Research Journal of Finance and Economics - Issue 5 (2006) 171 of India called ruthless efficiency and reduce bureaucracy by streamlining government procedures to make them more transparent and effective. Empowering the population through universal education and health care, India must maximize the benefits of its youthful demographics and turn itself into the knowledge hub of the world through the application of information and communications technology (ICT) in all aspects of Indian life although, the government is committed to furthering economic reforms and developing basic infrastructure to improve lives of the rural poor and boost economic performance. Government had reduced its controls on foreign trade and investment in some areas and has indicated more liberalization in civil aviation, telecom and insurance sector in the future.

Who all can get registered as FIIs

There is a long list of entities that are eligible to get registered as FIIs such as pension funds, mutual funds, insurance companies, investment trusts, banks, university funds, endowments, foundations, sovereign wealth funds, hedge funds and charitable trusts. In fact, asset management companies, investment managers, advisors or institutional portfolio managers set up and/or owned by NRIs are also eligible to be registered as FIIs. The nodal point for FII registrations is SEBI and hence all FIIs must register themselves with SEBI and should also comply with the exchange control regulation of the central bank. Apart from being allowed to invest in securities in primary and secondary markets FIIs can also invest in mutual funds. Dated government securities, derivatives traded on a recognized stock exchange and commercial papers.

Investment Ceilings for FIIs and its Regulations:

Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian company and 10% for NRIs/PSOs. The limit is 20% of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling of 24% for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body for the company passing a special resolution to that effect. And the ceiling of 10% for NRIs/PIOs can be raised to 24% subject to the approval of the general body of the company passing a resolution to that effect. The ceiling for FIIs is independent of the ceiling of 10/24 percent of NRIs/PIOs. The equity shares and convertible debentures of the companies with in the prescribed ceilings are available for purchase under PIS subject to: The total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being with in an overall ceiling limit of (a) 24 percent of the companys total paid up equity capital and (b) 24 percent of the total paid up value of each series of convertible debenture; and

The investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five percent of the paid up equity capital of the company of five percent of the total paid up value of each series of convertible debentures issued by the company.

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 percent of companies in which NRIs/PIOs can invest up to 10 percent of the companys paid up capital. The cut-off limit for companies with 24 percent ceiling is 22 percent and for companies with 30 percent ceiling, is 28 percent and so on. Similarly, the cut-off limit for public sector banks (including state Bank of India) is 18 percent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-comefirst served basis till such investments in companies reach 10/24/30/40/49 percent limit the sectoral caps/statutory ceiling as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the caution and the stop purchase in these companies through a press release.

Few Examples of companies in which FII investment has been made at different investment ceilings:
Companies where NRI investment has already reached 10% and no further purchases can be allowed

1. 2. 3. 4. 5. 6. 7.

DSQ Biotech Ltd Global Trust Bank Ltd. Madras Alluminium Co. Ltd SPL Ltd Seirra Optima Ltd The Baroda Rayon Corp Tai Industries Ltd.

Companies where NRI investment has reached 8% and further purchases are allowed only with prior approval RBI 1. 2. 3. 4. 5. Astra IDL Ltd. M/s. Codura Exports Ltd. IDL Industries Ltd. Nexus Software Ltd. Dalmia Cement (Bharat) Ltd.

Companies in which NRIs/PIOs investment is allowed up to 24% of their Paid-up Capital

1 2

Alembic Chemical Works Co. Ltd Amar Investments Ltd, Calcutta.

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

Anglo-India Jute Mills Co.Ltd. Arvind Mills, Ahmedabad Ashima Syntex Ltd, Ahmedabad Ashoka Viniyoga Ltd. Bharat Nidhi Ltd. BLB Shares & Financial Services Ltd BPL Ltd Burr Brown (India) Ltd Camac Commercial Company Ltd. Ceenik Exports (India) Ltd. Cifco Finance Ltd. Mumbai Classic Financial Services & Enterprises Ltd, Calcutta CPPL Ltd,(Reliance Ind. Infrastructure Ltd), Mumbai CRISIL DCM Shriram Consolidated Ltd. Dharani Sugars & Chemicals Ltd. Dolphin Offshore Enterprises (I) Ltd Essar Oil Ltd. Jagatjit Industries Ltd, New Delhi Jai Parabolic Springs Ltd, New Delhi Jaysynth Dyechem Ltd. Jindal Strips Ltd. Jindal Iron & Steel Co.Ltd. JJ Spectrum Silk Ltd Kartjikeya Paper & Boards Ltd. Lakhani India Ltd. Matsushita Television And Audio India Ltd M.P.Agro Fertilisers Ltd. Bhopal Macleod Russel (I) Ltd. Mazda Enterprises Ltd.Mumbai Media Video Ltd Multimetals Ltd, Mumbai National Steel Industries Ltd Nicholas Laboratories India Ltd, Mumbai O.P. Electronics Ltd, Mumbai Oriental Housing Development Finance Corp Ltd Padmini Technologies Ltd. Panacea Biotech Ltd. Pearl Polymers Ltd, New Delhi Piramal Healthcare Ltd. PNB Finance & Industries Ltd Rajath Leasing & Finance Ltd.

59 60

Rama Petrochemicals Ltd. Rama Phosphates Ltd.

1) Companies in which FII Investment is allowed up till 30% of their paid up capital :-

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

Aptech Ltd. Asian Paints (India) Ltd Capital Trust Ltd Container Corporation of India Ferro Alloys Corporation Ltd Garware Polyester Ltd. GIVO Ltd (formerly KB&T Ltd) Gujarat Ambuja Cements Ltd. Infotech Enterprises Ltd. Mastek Ltd. Orchid Chemicals and Pharmaceuticals Ltd Pentasoft Technologies Ltd (Pentafour Communications Ltd.) Polyplex Corporation Ltd Ranbaxy Laboratories Ltd Software Solutions Integrated Ltd Sonata Software Ltd The Credit Rating Information Services of India Ltd. The Paper Products Ltd Vikas WSP Ltd.

2) Companies in which FII Investment is allowed up to 40% of their paid up capial :1. 2. 3. 4. Balaji Telefilms Ltd. M/s. Burr Brown (India) Ltd. M/s. Elbee Services Ltd. Hero Honda Motors Ltd.

5. 6. 7. 8. 9. 10. 11. 12. 13.

Jyoti Structures Ltd. Maars Software International Ltd. Padmini Technologies Ltd. Pentamedia Graphics Ltd. Thiru Arooran Sugars Ltd. UTV Software Ltd. VisualSoft Technologies Ltd. M/s. Silverline Technologies Ltd. Ways India Ltd

3) Companies in which FII Investment is allowed up to 49% of their paid up capital :-

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Blue Dart Express Ltd CRISIL HDFC Bank Ltd Hindustan Lever Ltd Himachal Futuristic Communications Ltd Infosys Technologies Ltd. NIIT Ltd. Dr. Reddy's Laboratories Panacea Biotec Ltd. Reliance Industries Ltd. Reliance Petroleum Ltd. Sofia Software Ltd

13. 14. 15. 16.

Sun Pharmaceutical Industries Ltd United Breweries Ltd. United Breweries (Holdings) Ltd. Zee Telefilms Ltd.

Companies in which NRI/FII Investment is allowed upto 49% of their paid up capital 1. ICICI Bank Ltd.

Companies in which FII Investment is allowed upto sectoral cap/statutory ceiling of their paid up capital 1. 2. 3. 4. 5. 6. 7. 8. GTL Ltd. - (74%) Housing Development Finance Corporation Ltd. - (74%) Infosys Technologies Ltd. - (100%) Pentamedia Graphics Ltd. - (100%) Pentasoft Technologies Ltd. - (100%) Mascon Global Ltd. - (100%) Punjab Tractors Ltd. - (64%) Satyam Computer Services Ltd - (60%)

Companies where 22% FII investment limit has been reached and further purchases are allowed with prior approval of RBI 1. 2. ACC Ltd. Digital Global Soft Ltd.

Financial instruments are available for FII investments:

* Securities in primary and secondary markets including shares, debentures and

warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India. * * * * Units of mutual funds; Dated Government Securities; Derivatives traded on a recognized stock exchange; Commercial papers.

FIIs importance for Indian Markets:FIIs are among the major sources of liquidity for the Indian markets. If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their high confidence and a healthy investor sentiment for our markets. But with the current global financial turmoil and a liquidity and credit freeze in the international markets, FIIs have become net sellers (on a day to day basis). The entry or FIIs in India has brought mixed consequences for our markets, on one hand they have improved the breadth and depth of Indian markets and on the other hand they have also become the major sources of speculation in testing times like these.

Foreign Institutional Investment in India

India opened its stock market to foreign investors in September 1992 and has, since 1993, received portfolio investment from foreigners in the from of foreign institutional investment in equities. This has become one of the main channels of FII in India for foreigners. In order to trade in Indian equity market foreign corporations need to register with SEBI as Foreign Institutional Investor (FII). India allows only authorized foreign investors who are referred to as FIIs which include pension funds, investment trusts, asset management companies, university funds, endowments, foundation, charitable interests and charitable societies that have a track record of five years and which are registered with a statutory authority in their own country of incorporation or settlement. It is possible for foreigners to trade in Indian securities without registering as an FII but such cases require approval from the RBI or the Foreign Investment Promotion Board. FIIs generally concentrate in secondary market. The total amount of foreign institutional investment in India has accumulated to formidable sum of over US $ 11464.64 Million by the end of November 2002.

Data Description and Methodology for Variable Construction

To test the hypothesis entailed in the last section, we require data for returns, risk and inflation in domestic and foreign economy, and data on FII flowing into domestic

economy (India). US is chosen as the foreign country to model FII inflow in India, because US is our trade partner and accounts for the largest proportion of FII following to India. (42 percent)3. Hence US could safely be used as proxy for rest of the world, to Study prices, (Return = logPt-logPt12). Composite BSE Sensex is used for Indian stock prices and S& P 500 is used for US stock prices. This study uses Standard & Poors 500 Index because it is usually considered as the benchmark for U.S equity performance. It represents 70% of all U.S. publicly traded companies. Part of the indexs popularity is due to its close association with the largest mutual fund in the world, the Vanguard 500 Index Fund, and Spiders, the first exchange traded fund. The listed companies are highly diverse, spanning every relevant portion of the U.S. economy. The S&P 500 index also tends to be the default when people discuss index funds, since index funds based on other indexes were not widely available until recently. To capture risk, monthly standard deviations are computed from daily returns on composite BSE Sensex and S&P 500. We Would use ex ante risk rather than realized risk, because realized risk represents a combination of ex ante risk and unexpected risk. While FII may exhibit a negative relationship with predicted risk, its relationship with unanticipated standard deviation could be positive. Since the relative importance of ex ante risk and unexpected risk could vary overtime, one may get obscure relationship between FII and realized risk. Wholesale Price Index is used to calculate year-on-year inflation in India and Producer Price index is used to calculated inflation in US. Monthly data has been used from January 1994 to November 2002. First year (1993) is considered as learning period for foreign investors and hence an outlier, so it is not included in the estimate.

2.3 : What is the Indian Rupee (INR)?

The Indian Rupee is the original official currency of India. The English translation of Rupee is Silver, and the name exists because it was previously a silver coin. This very fact had severe consequences in the 19th century, when the strongest economies in the world were on the gold standard. The discovery of vast quantities of silver in the U.S. and various European colonies resulted in a decline in the relative value of silver to gold. Suddenly, the standard currency of Indian could not buy as much from the outside world. Such circumstances led to what is now referred to as the fall of the Rupee. During the period 1950-1951 until mid-December 1973, India followed an exchange rate regime with the Rupee linked to the pound sterling, except for the devaluations in 1966 and 1971. When the pound sterling floated on June 23,1972 the Rupees link to the British unit was maintained-thus, paralleling the Pounds depreciation and de facto devaluation. In 1975, the Rupees ties to the Pound Sterling were disengaged. India established a float exchange regime, with the Rupees effective rate placed on a controlled, floating basis and linked to a basket of currencies of Indias major trading partners. More recently, the Indian Rupee has been depreciating in step formation, but roughly in line

with the fall in its Purchasing Power Parity since the early 1980s. While the PPP was 15 around 1982, the actual exchange rate was 9.30 per US dollar. After the devaluation, the Rupee underwent the change from a controlled regime to a Managed or Dirty float regime, where the market supposedly determines the exchange rate. In mid 2005, the actual rate was near 43.60. Sovereign credit ratings play an important part in determining a countrys access to international capital markets, and the terms of that access. Sovereign ratings help to foster dramatic growth, stability, and efficiency of international and domestic.

Latest Symbol of Indian National Rupee

D. Udaya Kumar
Research Scholar of Indian Rupee symbol IIT Bombay

What does it look like?

Old and New Indian Coins

Political Structure
India is a federal republic with a parliamentary from of government. The Parliament consists of a bicameral national legislature, with the Rajya Sabha (Council of States) containing 250 members and the Lok Sabha (House of the People) with 545 members. India is a Union of 28 States and seven centrally administered union territory

Prominent Figures
The President of India is SMT. PRATIBHA DEVISINGH PATAL. The Prime Minister of India is Manmohan Singh, who assumed the position on may 22, 2004. The Reserve Bank of India is the central bank of India, and it controls the issurance of currency throughout the nation.

Unique Characteristics
The INR is being pushed by Indias strong growth rate and speculation that there may be an imminent adjustment to Chinas FX regime. In addition, Indias trade deficit has experienced record highs in 2005 and 2006. Throughout 2005, the Reserve Bank of Indias has seemed to be apathetic to the overvaluation of the Rupee. This apathy is letting devices work toward their ends, as an overvalued Rupee is helping to maintain a balance between inflation and growth. An overvalued currency in an environment of high imported prices, can moderate inflationary pressures. Once the inflation rate returns to more tolerable levels, the overvaluation concerns will once again get back into focus.

Key Economic Factors

Consumer Price Index :
The CPI is used to measure inflation by computing changes in prices of products consumed by households. In India, prices are susceptible to rapid increases. Consumers are not immune to these price hikes, as wholesalers have a strong ability to pass the raise in price raise in price along.

Gross Domestic Product :

The Central Statistical Office of India recently started using data reporting standards of the International Monetary Fund (IMF), reporting the GDP in early quarters of the late 1990s. The GDP measures the total production and consumption of goods and services in India. It is necessary to look at changes in real GDP growth in Indias primary industries, which include agriculture, manufacturing, trade, hotels, transport and communication.

Industrial Production :

The index of Industrial Production (IIP) is a monthly composite of the value of industrial production in various sectors of industrial sectors of the economy. The current

IIP includes the mining, manufacturing and electricity industries, each with different weights. The mining and utility industries in India are especially worth watch in.

2.4 : INDIAN FOREIGN EXCHANGE MARKET : A HISTORICAL PERSPECTIVE

Early Stages : (1947-1977)
The evolution of Indias foreign exchange market may be viewed in line with the shifts in Indias exchange rate policies over the last few decades from a par value system to a basket-peg and further to a managed float exchange rate system. During the period from 1947 to 1971, India followed the per value system of exchange rate. Initially the rupees external per value was fixed at 4.15 grains of fine gold. The Reserve Bank maintained the per value of the rupee within the permitted margin of =1 percent using pound sterling as the intervention currency. Since the sterling dollar exchange rate was kept stable by the US monetary authority, the exchange rates of rupee in terms of gold as well as the dollar and other currencies were indirectly kept stable. The devaluation of rupee in September 1949 and June 1966 in terms of gold resulted in the reduction of the per value or rupee in terms of gold to 2.88 and 1.83 grains of fine gold, respectively. The exchange rate of the rupee remained unchanged between 1966 and 1971. Given the fixed exchanged regime during this period, the foreign exchange market for all practical purpose was defunct. Bank were required to undertake only cover operations and maintain a square or near square position at all times. The objective of exchange controls was primarily to regulate the demand for foreign exchange for various purposes, within the limit set by the available supply. The Foreign Exchange Regulation Act initially enacted in 1947 was placed on a permanent basis in 1957. In terms of the provisions of the Act, the Reserve Bank, and in certain cases, the central Government controlled and regulated the dealings in foreign exchange payments outside India, export and import of currency notes and bullion, transfers of securities between residents and non-residents, acquisition of foreign securities, etc.

With the breakdown of the Bretton Woods System in 1971 and the floatation of major currencies, the conduct of exchange rate policy posed a serious challenge to all central banks world wide as currency fluctuations opened up tremendous opportunities for market players to trade in currencies in a borderless market. In December 1971, the rupee was linked with pound sterling. Since sterling was fixed in terms of US dollar under the Smithsonian Agreement of 1971, the rupee also remained stable against dollar. In order to overcome the weaknesses associated with a single currency peg and to ensure stability of the exchange rate, the rupee, with effect from September 1975, was pegged to a basket of currencies. The currency selection and weights assigned were left to the discretion of the Reserve Bank. The currencies included in the basket as well as their relative weights were kept confidential in order to discourage speculation. It was around this time that banks in India became interested in trading in foreign exchange.

Formative Period : (1978 1992)

The impetus to trading in the foreign exchange market in India came in 1978 when banks in India were allowed by the Reserve Bank to undertake intra-day trading in foreign exchange and were required to comply with the stipulation of maintaining square or near square position only at the close of business hours each day. The extent of position which could be left uncovered overnight (the open position) as well as the limits up to which dealers could trade during the day were to be decided by the management of banks. The exchange rate of the rupee during this period was officially determined by the Reserve Bank of its buying and selling rates to the Authorized Dealers (Ads) for undertaking merchant transactions. The spread between the buying and the selling rates was 0.5 percent and the market began to trade actively within this range. Ads were also permitted to trade in cross currencies (one convertible foreign currency versus another). However, no position in this regard could originate in overseas markets. As opportunities to make profits began to emerge, major banks in India started quoting two-way prices against the rupee as well as in cross currencies and, gradually, trading volumes began to increase. This led to the adoption of widely different practices (some of them being irregular) and the need was felt for a comprehensive set of guidelines for operation of banks engaged in foreign exchange business. Accordingly, the Guidelines for Internal Control over Foreign Exchange Business, were framed of adoption by the bank in 1981. The foreign exchange market in India till the early 1990s, however, remained highly regulated with restrictions on external transactions, barriers to entry, low liquidity and high transaction costs. The exchanges rate during this period was managed mainly for facilitating Indias imports. The strict control on foreign exchange transactions through the Foreign Exchange Regulations Act (FERA) had resulted in one of the largest and most efficient parallel markets for foreign exchange in the world, i.e., the hawala (unofficial) market.

By the late 1980s and the early 1990s, it was recognized that both macroeconomic policy and structural factors had contributed to balance of payments difficulties. Devaluation by Indias competitors had aggravated the situation. Although exports had recorded a higher growth during the second half of the 1980s (from about 4.3 percent of GDP in 1987-88 to about 5.8 percent of GDP in 1990-91), trade imbalances persisted at around 3 percent of GDP. This combined with a precipitous fall in invisible receipt in the form of private remittances, travel and tourism earnings in the year 1990-91 led to further widening of current account deficit. The weaknesses in the external sector were accentuated by the Gulf crisis of 1990-91. As a result, the current account deficit widened to 3.2 percent of GDP 1990-91 and the capital flows also dried up necessitating the adoption of exceptional corrective steps. It was against this backdrop that India embarked on stabilization and structural reforms in the early 1990s.

Post-Reform Period : 1992 onwards

This phase was marked by wide ranging reform measures aimed at widening and deepening the foreign exchange market and liberalization of exchange control regimes. A credible macroeconomic, structural and stabilization programme encompassing trade, industry, foreign investment, exchange rate, public finance and the financial sector was put in place creating an environment conducive for the expansion of trade and investment. It was recognized that trade policies, exchange rate policies and industrial policies should from part of an integrated policy framework to improve the overall productivity, competitiveness and efficiency of the economic system, in general and the external sector, in particular. As a stabilsation measure, a two step downward exchange rate adjustment by 9 percent and 11 percent between July 1and 3, 1991 was resorted to counter the massive drawdown in the foreign exchange reserves, to instill confidence among investors and to improve domestic competitiveness. A two-step adjustment of exchange rate in July 1991 effectively brought to close the regime of a pegged exchange rate. After the Gulf crisis in 1990-91, the broad framework for reforms in the external sector was laid out in the Report of the High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan). Following the recommendations of the Committee to move towards the market-determined exchange rate, the liberalized Exchange Rate Management System (LERMS) was put in place in March 1992 initially involving a dual exchange rate system. Under the LERMS, all foreign exchange receipts on current account transactions (exports, remittances, etc.) were required to be surrendered to the Authorized Dealers (Ads) in full. The rate of exchange for conversion of 60 percent of the proceeds of these transactions was the market rate quoted by the ADs, while the remaining 40 percent of the proceeds were converted at the Reserve Banks official rate. The ADs, in turn, were required to surrender these 40 percent of their purchase of foreign currencies to the Reserve Bank. They were free to retain the balance 60 percent of foreign exchange for selling in the free market for permissible transactions. The LERMS was essentially a transitional mechanism and a downward adjustment in the official exchange rate took

place in early December 1992 and ultimate convergence of the dual rates was made effective from March 1, 1993, leading to the introduction of a market-determined exchange rate regime.

The dual exchange rate system was replaced by a unified exchange rate system in March 1993, whereby all foreign exchange receipts could be converted at market determined exchange rates. On unification of the exchange rates, the nominal exchange rate of the rupee against both the US dollar as also against a basket of currencies got adjusted lower, which almost nullified the impact of the previous inflation differential. The restrictions on a number of other current account transactions were relaxed. The unification of the exchange rate of the Indian rupee was an important step towards current account convertibility, which was finally achieved in August 1994, when India accepted obligations under Article VIII of the Articles of Agreement of the IMF With the rupee becoming fully convertible on all current account transactions, the risk-bearing capacity of banks increased and foreign exchange trading volumes started rising. This was supplemented by wide-ranging reforms undertaken by the Reserve Bank in conjunction with the Government to remove market distortions and deepen the foreign exchange market. The process has been marked by gradualism with measures being undertaken after extensive consultations with experts and market participants. The reform phase began with the Sodhani Committee (1994) which in its report submitted in 1995 made several recommendations to relax the regulations with a view to vitalizing the foreign exchange market.

Recommendations of the Expert Group on Foreign Exchange Markets In India

The Expert Group on Foreign Exchange Markets in India (Chairman : Shri O.P. Sodhani), which submitted its Report in 1995, identified various regulations inhibiting the growth of the market. The Group recommended that the corporate may be recommended that banks should be permitted to fix their own exchange position limits such as intra-day and overnight limits, subject to ensuring that the capital is provided marked to the extent of 5 percent of this limit based on internationally accepted guidelines. The Group also favored fixation of Aggregate Gap Limit (AGL), which would also include rupee transactions, by the managements of the banks based on capital risk taking capacity, etc. It recommended that banks be allowed to initiate cross currency positions abroad and to lend or borrow short-term funds up to six months, subject to a specified ceiling. Another important suggestion related to allowing exporters to retain 100 percent of their export earnings in any foreign currency with an Authorized Dealer (AD) in India, subject to liquidation of outstanding advances against export bills. The Group was also in favor of permitting ADs to determined the interest rates and maturity period in respect of FCNR (B) deposits. It recommended selective intervention by the Reserve Bank in the market so as to ensure greater orderliness in the market.

In addition, the Group recommended various other short-term and long-term measures to activate and facilitate functioning of markets and promoted the development of a vibrant derivative market. Short-term measures recommended included exemption of domestic inter-bank borrowings from SLR/CRR requirements to facilitate development of the term money market, cancellation and re-booking of currency options, permission to offer lower cost option strategies such as the range forward and ratio range forward and permitting ADs to offer any derivative products on a fully covered basis which can be freely used for their own asset liability management. As part of long-term measures, the Group suggested that the Reserve Bank should invite detailed proposals from banks for offering rupee-based derivatives, should refocus exchange control regulation and guidelines on risks rather than on products and frame a fresh set of guidelines for foreign exchange and derivatives risk management. As regards accounting and disclosure standards, the main recommendations included reviewing of policy procedures and transactions on an on-going basis by a risk control team independent of dealing and settlement functions, ensuring fo uniform documentation and market practices by the Foreign Exchange Dealers Association of India (FEDAI) or any other body and development of accounting disclosure standard. Most of the recommendations of the Sodhani Committee relating to the development of the foreign exchange market were implemented during the latter half of the 1990s. In addition several initiatives aimed at dismantling controls and providing and enabling environment to all entities engaged in foreign exchange transactions have been undertaken since the mid-1990s. The focus has been on developing the institutional framework and increasing the instruments for effective functioning, enhancing transparency and liberalizing the conduct of foreign exchange business so as to move away from micro management of foreign exchange transactions to macro management of foreign exchange flows (Box VI.3). An Internal Technical Group on the Foreign Exchange Markets (2005) set up by the Reserve Bank made various recommendations for further liberalization of the extant regulations. Some of the recommendations such as freedom to cancel and rebook forward contracts of any tenor, delegation of powers to ADs for grant of permission to corporates to hedge their exposure to commodity price risk in the international commodity exchanges/markets and extension of the trading hours of the inter-bank foreign exchange market have since been implemented. Along with these specific measures aimed at developing the foreign exchange market, measures towards liberalizing the capital account were also implemented during the last decade, guided to a large extent since 1997 by the Report of the Committee on Capital Account Convertibility (Chairman : Shri S.S. Tarapore). Various reform

measures since the early 1990s have had a profound effect on the market structure, depth, liquidity and efficiency of the Indian foreign exchange market as detailed in the following section.

Measures Initiated to Develop the Foreign Exchange Market in India Institutional Framework.

The Foreign Exchange Regulation Act (FERA),1973 was replaced by the market friendly Foreign Exchange Management Act (FEMA), 1999. The Reserve Bank delegated powers to authorized dealers (ADs) to release foreign exchange for a variety of purposes.

* In pursuance of the Siobhan Committees recommendations, the Clearing Corporation of India Limited (CCIL) was set up in 2001. * To further the participatory process in a more holistic manner by taking into account all segments of the financial markets, the ambit of the Technical Advisory Committee (TAC) on Money and Securities Markets set up by the Reserve Bank in 1999 was expanded in 2004 to include foreign exchange markets and the Committee was rechristened as TAC on Money, Government Securities and Foreign Exchange Markets Increase in Instruments in the Foreign Exchange Market. * The rupee-foreign currency swap market was allowed

* Additional hedging instruments such as foreign currency-rupee options, crosscurrency options, interest rate swaps (IRS) and currency swaps, caps/collars and forward rate agreements (FRAs) were intrduced.

2.5 Introduction of Volatility

In finance, volatility most frequently refers to the standard deviation of the continuously compounded returns of a financial instrument within a specific time horizon. It is common for discussions to talk about the volatility of a security's price, even while it is the returns' volatility that is being measured. It is used to quantify the risk of the financial instrument over the specified time period.

Volatility as described here refers to the actual current volatility of a financial instrument for a specified period (for example 30 days or 90 days). It is the volatility of a financial instrument based on historical prices over the specified period with the last observation the most recent price. This phrase is used particularly when it is wished to distinguish between the actual current volatility of an instrument and

actual historical volatility which refers to the volatility of a financial instrument over a specified period but with the last observation on a date in the past actual future volatility which refers to the volatility of a financial instrument over a specified period starting at the current time and ending at a future date (normally the expiry date of an option) historical implied volatility which refers to the implied volatility observed from historical prices of the financial instrument (normally options) current implied volatility which refers to the implied volatility observed from current prices of the financial instrument future implied volatility which refers to the implied volatility observed from future prices of the financial instrument

Volatility vs. Direction

Volatility does not measure the direction of price changes, merely their dispersion. This is because when calculating standard deviation (or variance), all differences are squared, so that negative and positive differences are combined into one quantity. Two instruments with different volatilities may have the same expected return, but the instrument with higher volatility will have larger swings in values over a given period of time. For example, a lower volatility stock may have an expected (average) return of 7%, with annual volatility of 5%. This would indicate returns from approximately -3% to 17% most of the time (19 times out of 20, or 95%). A higher volatility stock, with the same expected return of 7% but with annual volatility of 20%, would indicate returns from approximately -33% to 47% most of the time (19 times out of 20, or 95%)

Chapter No.3

OBJECTIVE OF THE STUDY

OBJECTIVE OF THE STUDY

To analyze the impact of the investment made by FIIs on exchange rate of Indian rupee. To study the scope and trading mechanism of Foreign Institutional investors in India. Impact can be seen in term of volatility of the exchange rate.

To find the relationship between the FIIs equity investment pattern and Exchange rates.

Volatility of the exchange rate denotes to the ups & down in the exchange rate due to fluctuation of the FIIs. Volatility of the exchange rate is an unavoidable situation which is bound to happen over a period of time. Calculate the volatility in term of standard deviation.

Chapter No.4

SCOPE & NEED OF STUDY

SCOPE AND NEED OF STUDY

Scope of the study is very broader and covers the impact of foreign institutional investors on exchange rates . But, study is only going to cover Net foreign investments and exchange rates in form of equity. The time period is taken from financial year beginning to ending i.e. April 2003 to March 2010 as it will give exact impact in both the bullish and bearish trend.

The study will provide a very clear picture of the impact of foreign institutional investors on Exchange rates. It will also describe the market trends due to FIIs inflow and outflow.

The study would be helpful for further descriptive studies on the ideas that will be explored. Moreover, it would be beneficial to gain knowledge regarding foreign institutional investments, their process of registration and their impact of foreign institutional investors on exchange rates and value of Indian national rupee in terms of volatility.

Chapter No.5

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

5.1: PROBLEM DEFINITION

To analyze the impact of investment made by Foreign Institutional Investors (FII) on the Exchange rate of Indian Rupee. FII make investment India what is its effect on Exchange Rate it can be increase or decrease.

5.2: RESEARCH DESIGN

Research Design is the plan structure and strategy of investigation conceived so as to obtain answers to research problems. It is specification of methods and procedures for acquiring the information needed. In this project Causal Research Design has been used to analyze the cause and effect relationship between the variables. Causal research design is applied to find out the impact of independent variable investment made by FII on various dependent variables related to Exchange rate of Indian rupee. These dependent variables include: Closing values of Exchange rate Volatility i.e., Standard Deviation

Exploratory Research

As an exploratory study is conducted with an objective to gain familiarity with the phenomenon or to achieve new insight into it, this study aims to find the new insights in terms of finding the relationship between FIIS and Exchange Rates.

SAMPLING DESIGN
Universe In this study the universe is finite and will take into the consideration related news and events that have happened in last few year. Sampling Unit: -

As this study revolves around the foreign institutional investment and Exchange Rates. So for the sampling unit is confined for the both i.e. Net Foreign Investment & Exchange Rates.

SAMPLING TECHNIQUE
Convenient Sampling:- Study conducted on the basis of availability of the Data and requirement of the project. Study requires the events that have impact foreign institution investors on exchange rates.

RESEARCH ANALYSIS TOOLS

Regression analysis and Correlation analysis: Regression Analysis: We can analyze that the net investment by FII is a dependant variable and the Exchange Rate is an independent variable. for example, impact of FII investment on the Indian exchange rate can be observed by change in the FII investment then it can be affect the Exchange rate. Correlation: This analysis tool and its formulas measure the relationship between two data sets that are scaled to be independent of the unit of measurement. The variable correlation calculation returns the covariance of two data sets divided by the product of their standard deviations. We can use the Correlation tool to determine whether two ranges of data move together that is, whether large values of one set are associated with large values of the other (positive correlation), whether small values of one set are associated with large values of the other (negative correlation), or whether values in both sets are unrelated (correlation near zero).

5.3: DATA COLLECTION:

The Secondary sources have been used for the collection of the data used in the research. Secondary Data: Secondary data may be defined as the data that has been collected earlier for some purpose other than the purpose of the present study. Any data that is available prior to the commencement of the research project is secondary data, and therefore secondary data is also called as the historical data. Secondary data sources provide a wealth of information to the researcher. It often obviates the need of the primary data collection and saves valuable time, effort and money. Even where subsequent primary data collection is required an analysis of secondary data enlightens the researcher regarding many aspect of the study and gives contextual familiarity for primary data collection. It thus provides rich insights into the research process. As there are not possibilities of collecting data personally so no questionnaire is made.

SOURCES OF SECONDARY DATA: Secondary Data

Published Sources

Unpublished Sources

1. Census Report 2. Planning Commission Reports and statistics 3. Government Report 4. Annual Report of RBI, RBI Bulletin etc.

1. Letters, Diaries 2. Biographies, Autobiographies 3. Accounting and inancial Records 4. Personal Records

In this project, secondary data of the previous years (from year 2005 to 2010) has been collected for the testing the hypothesis. The data required for the analysis of the impact of FIIs on Exchange Rate dollar Vs INR are 1. Monthly net inflow of the FII investment from April 2003 to March 2010 (Rs. in crore) 2. Monthly Exchange Rate dollar Vs INR from April 2003 to March2010

SAMPLE SIZE:

1. Monthly average closing of Exchange rate from April 2003 to March 2010 total sample

84

2. Monthly average Net Inflow investment by FIIs from April 2003 to March 2010 total 84sample.

Chapter No.6

HYPOTHESIS

HYPOTHESIS
In this project we are trying to analyze the impact of the FII investment on the Exchange rate of Indian rupee. Comparison between US Dollar Vs Indian Rupee. In hypothesis it is assumed that there is a direct relation of FII investment (Net Flow from FII) and the volatility of the exchange rate.

Hypothesis : 1 Ho (Null Hypothesis) : The net FII dollar inflow increases then the rupee value are
appreciates means the Exchange Rate decrease. H1 (Alternate Hypothesis) : The net FII dollar inflow decreases then the rupee value decrease means Exchange Rate appreciates.

Hypothesis : 2
Ho (Null Hypothesis) : The FII dollar inflow has increase the volatility of Exchange Rate of dollar Vs rupee. H1 (Alternate Hypothesis): The FII dollar inflow hasnt increase the volatility of Exchange Rate of dollar Vs rupee. The Hypothesis can be tested using the Regression Equation and plotting the regression line on the graph. The accuracy of the result will be dependent of Standard Error associated with the calculation.

Chapter No.7

DATA TABULATION

DATA TABULATION
For this study, historical monthly data of previous 7 years have been tabulated.

Table 1 : Table containing the Net FII Inflow. It has been taken as the net position of the Net Inflow of FII at the end of each month. All amounts are Rs. In Crore. Table 2 : Table containing the data of Exchange Rate of Indian rupee. All the amounts in rupees (All the values have been taken as the position at the end of each month).

Table : Net FII Investment (Monthly Position of Net FII Investment, From 1st April 2003 to 31st March 2010 total 84 data point)
Sr.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Duration In Month Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 June-04 July-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 FII Net Inflow (Rs. In Crore) 572.38 1232.95 2592.95 2495.89 2058.07 4047.69 6939.72 3282.39 6290.59 2492.86 3182.74 8811.80 4207.86 -3151.29 511.00 1292.83 2850.25 2815.61 3952.04 6344.57 5890.00 1324.24 7493.76 7885.58 -946.29 -586.82 5699.40 7390.55 4084.87 3258.00 -3808.31 4559.07 9615.32 5177.18 7859.26 6347.74 722.07 -8930.32 1781.87 1073.16 3998.05

42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82

Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 June-08 July-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 June-09 July-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10

4624.13 5805.01 7028.59 -1869.49 3184.86 4279.07 2057.05 4257.88 3242.17 7210.02 19515.29 -6476.32 19823.40 16375.64 -3052.11 5054.92 -13000.98 7784.26 1354.39 1475.95 -3378.41 -10429.39 -1653.81 -2808.24 -7548.91 -13461.39 -2607.45 2207.88 -3897.01 -1758.84 521.87 8122.99 21114.76 4331.55 11987.48 3847.28 20334.61 8558.21 5728.01 10600.75 -2435.27

83 84

Feb-10 Mar-10

2734.14 19976.61

Graph 1 : Net FII Investment (Closing Investment of FII at the end of every month 30th April 2003 to 30th Mar 2004 )

Graph 2 : Net FII Investment (Closing Investment of FII at the end of every month 30th April 2004 to 30th Mar 2005 )

Graph 3 : Net FII Investment (Closing Investment of FII at the end of every month 30th April 2005 to 30th Mar 2006 )

Graph 4 : Net FII Investment (Closing Investment of FII at the end of every month 30th April 2006 to 30th Mar 2007 )

Graph 5: Net FII Investment (Closing Investment of FII at the end of every month 30th April 2007 to 30th Mar 2008 )

Graph 6: Net FII Investment (Closing Investment of FII at the end of every month 30th April 2008 to 30th Mar 2009 )

Graph 7: Net FII Investment (Closing Investment of FII at the end of every month 30th April 2009 to 30st Mar 2010 )

Table 1: Exchange Rate (Monthly Position of Exchange Rate at the end of every month, from 1st April 2003 to 31st March 2010)
Sr.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Duration In Month Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 June-04 July-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Exchange Rate 47.3758 47.0816 46.7098 46.2300 45.9330 45.8471 45.3873 45.5221 45.5880 45.4557 45.2703 45.0179 43.9311 45.2508 45.5068 46.0416 46.3410 46.0950 45.7826 45.1251 43.9796 43.7545 43.6798 43.6905 43.7412 43.4889 43.5836 43.5361 43.6245 43.9150 44.8180 45.7265 45.6411 44.3970 44.3289 44.4810 44.9491 45.4073 46.0561 46.4562

41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84

Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 June-08 July-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 June-09 July-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10

46.5370 46.1181 45.4676 44.8507 44.6351 44.3325 44.1583 44.0260 42.1482 40.7814 40.7736 40.4139 40.8212 40.3400 39.5114 39.4364 39.4395 39.3737 39.7326 40.3561 40.0224 42.1250 42.8202 42.8308 42.9374 45.5635 48.6555 48.9994 48.6345 48.8338 49.2611 51.2287 50.0619 48.5330 47.7714 48.4783 48.3350 48.4389 46.7211 46.5673 46.6288 45.9598 46.3279 45.4965

Graph 1 : Exchange Rate (Exchange Rate at the end of every month from 30th April 2003 to 31st Mar 2004)

Graph 2 : Exchange Rate (Exchange Rate at the end of every month from 30th April 2004 to 31st Mar 2005)

Graph 3 : Exchange Rate (Exchange Rate at the end of every month from 30th April 2005 to 31st Mar 2006)

Graph 4 : Exchange Rate (Exchange Rate at the end of every month from 30th April 2006 to 31st Mar 2007)

Graph 5 : Exchange Rate (Exchange Rate at the end of every month from 30th April 2007 to 31st Mar 2008)

Graph 6 : Exchange Rate (Exchange Rate at the end of every month from 30th April 2008 to 31st Mar 2009)

Graph 7 : Exchange Rate (Exchange Rate at the end of every month from 30th April 2009 to 31st Mar 2010)

Chapter No.8

DATA Interpretation & Analysis

DATA INTERPRETATION AND ANALYSIS

Impact of FII Investment on the Indian Exchange rate can be observed by change in the FII Investment then it can be affect the Exchange Rate. This impact can be statistically represented through a regression line indicating the effect of net investment of FII on the growth of the market capitalization In this regression equation the net investment by FII is a dependent variable and the Exchange Rate is an independent variable

Sr.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Duration Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 June-04 July-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05

FII Investment 572.38 1232.95 2592.95 2495.89 2058.07 4047.69 6939.72 3282.39 6290.59 2492.86 3182.74 8811.80 4207.86 -3151.29 511.00 1292.83 2850.25 2815.61 3952.04 6344.57 5890.00 1324.24 7493.76 7885.58 -946.29 -586.82 5699.40 7390.55 4084.87

Exchange Rate ($ Vs INR) 47.3758 47.0816 46.7098 46.2300 45.9330 45.8471 45.3873 45.5221 45.5880 45.4557 45.2703 45.0179 43.9311 45.2508 45.5068 46.0416 46.3410 46.0950 45.7826 45.1251 43.9796 43.7545 43.6798 43.6905 43.7412 43.4889 43.5836 43.5361 43.6245

30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76

Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 June-08 July-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 June-09 July-09

3258.00 -3808.31 4559.07 9615.32 5177.18 7859.26 6347.74 722.07 -8930.32 1781.87 1073.16 3998.05 4624.13 5805.01 7028.59 -1869.49 3184.86 4279.07 2057.05 4257.88 3242.17 7210.02 19515.29 -6476.32 19823.40 16375.64 -3052.11 5054.92 -13000.98 7784.26 1354.39 1475.95 -3378.41 -10429.39 -1653.81 -2808.24 -7548.91 -13461.39 -2607.45 2207.88 -3897.01 -1758.84 521.87 8122.99 21114.76 4331.55 11987.48

43.9150 44.8180 45.7265 45.6411 44.3970 44.3289 44.4810 44.9491 45.4073 46.0561 46.4562 46.5370 46.1181 45.4676 44.8507 44.6351 44.3325 44.1583 44.0260 42.1482 40.7814 40.7736 40.4139 40.8212 40.3400 39.5114 39.4364 39.4395 39.3737 39.7326 40.3561 40.0224 42.1250 42.8202 42.8308 42.9374 45.5635 48.6555 48.9994 48.6345 48.8338 49.2611 51.2287 50.0619 48.5330 47.7714 48.4783

77 78 79 80 81 82 83 84

Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10

3847.28 20334.61 8558.21 5728.01 10600.75 -2435.27 2734.14 19976.61

48.3350 48.4389 46.7211 46.5673 46.6288 45.9598 46.3279 45.4965

The regression equation of Exchange Rate on the net inflow of FII can be given in the form of Y= a + b*X To solve the above equation we need two more equation, given by: Y= N*a + b* X and XY= a X + b X2

In the above equation, Y is exchange rate (Dependent Variable), X is Net FII Investment (Independent Variable) and a & b are two constants which are known to be the intercept and slope respectively. With the help of the tabulated values we can construct a regression equation of Exchange Rate on Net FII investment. Y=0.576x-18992 a = 18992 is the intercept on Y axis & b= 0.576x is slope of the equation By calculating the Coefficient of Correlation We can define the relationship of the two variables Exchange Rate and Net inflow of FII. Using the above tabulated values the coefficient of correlation is calculated to be r = 0.063 which denotes the two variables having a very low positive relationship with each other. The value of r2 = 0.004 or 0.40% that indicated the effect of the FII inflow has about 0.40% effect on Exchange Rate.

The Graphical representation of the regression equation is given below:-

The above graphical presentation of the regression equation Y =0.576x-18992 axis denotes the Net investment done by the FIIs and Y axis denotes the subsequent Exchange Rate.

Calculation of Standard Deviation measuring the for volatility Year April2003-March2010

Period Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 June-04 July-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Exchange Rate(X) 47.3758 47.0816 46.7098 46.2300 45.9330 45.8471 45.3873 45.5221 45.5880 45.4557 45.2703 45.0179 43.9311 45.2508 45.5068 46.0416 46.3410 46.0950 45.7826 45.1251 43.9796 43.7545 43.6798 43.6905 43.7412 43.4889 43.5836 43.5361 43.6245 43.9150 44.8180 45.7265 45.6411 44.3970 44.3289 44.4810 44.9491 45.4073 46.0561 46.4562 46.5370 46.1181 Ass. Mean 45 X=(X-A.M) 2.3758 2.0816 1.7098 1.2300 0.933 0.8471 0.3873 0.5221 0.5880 0.4557 0.2703 0.0179 -1.0689 0.2508 0.5068 1.0416 1.3410 1.0950 0.7826 0.1251 -1.0204 -1.2455 -1.3202 -1.3095 -1.2588 -1.5111 -1.4164 -1.4639 -1.3755 -1.085 -0.182 0.7265 0.6411 -0.603 -0.6711 -0.519 -0.0509 0.4073 1.0561 1.4562 1.5370 1.1181 X2 5.6444 4.3330 2.9234 1.5129 0.8705 0.7176 0.1500 0.2726 0.3457 0.2077 0.7306 0.0003 1.1425 0.0629 0.2568 1.0849 1.7983 1.1990 0.6125 0.0157 1.0412 1.5513 1.7429 1.7148 1.5846 2.2834 2.0062 2.1430 1.8920 1.1772 0.03312 0.5278 0.4110 0.3636 0.4504 0.2694 0.0026 0.1659 1.1153 2.1205 2.3624 1.2501

Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 June-08 July-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 June-09 July-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10

45.4676 44.8507 44.6351 44.3325 44.1583 44.0260 42.1482 40.7814 40.7736 40.4139 40.8212 40.3400 39.5114 39.4364 39.4395 39.3737 39.7326 40.3561 40.0224 42.1250 42.8202 42.8308 42.9374 45.5635 48.6555 48.9994 48.6345 48.8338 49.2611 51.2287 50.0619 48.5330 47.7714 48.4783 48.3350 48.4389 46.7211 46.5673 46.6288 45.9598 46.3279 45.4965 3769.233

0.4676 -0.1493 -0.3649 -0.6675 -0.8417 -0.974 -2.8518 -4.2186 -4.2264 -4.5861 -4.1788 -4.6600 -5.4886 -5.5636 -5.5605 -5.6263 -5.2674 -4.6439 -4.9776 -2.875 -2.1798 -2.1692 -2.0626 0.5635 3.6555 3.9994 3.6345 3.8338 4.2611 6.2287 5.0619 3.5330 2.7714 3.4783 3.3350 3.4389 1.7211 1.5673 1.6288 0.9598 1.3279 0.4965 -10.767

0.2186 0.0223 0.1332 0.4456 0.7085 0.9487 8.1328 17.7966 17.8625 21.0323 17.4624 21.7156 30.1247 30.9536 30.9192 31.6553 27.7455 21.5658 24.7765 8.2656 4.7515 4.7054 4.2543 0.3175 13.3627 15.9952 13.2096 14.6980 18.1570 38.7967 25.6228 12.4821 7.6806 12.0986 11.1222 11.8260 2.9622 2.4564 2.6530 0.9212 1.7633 0.2465 582.65812

The Mean Value of the index value is 44.872 Variance = x2 /n-1, where n is the sample size (84) Standard Deviation () = Variance = 2.650

Calculation of Standard Deviation for measuring the volatility Year Apr1990March1992 Ass.Mean 28 Period Exchange Rate(X) X'=(X-A.M.) X'2 Apr-90 25.94 -2.06 4.2436 May-90 25.92 -2.08 403264 Jun-90 25.91 -2.09 4.3681 Jul-90 25.84 -2.16 4.6656 Aug-90 26.2 -1.8 3.24 Sep-90 26.3 -1.7 2.89 Oct-90 27.9 -0.1 0.01 Nov-90 28.7 0.7 0.49 Dec-90 29.1 1.1 1.21 Jan-91 29.12 1.12 1.2544 Feb-91 28.59 0.59 0.3481 Mar-91 28.22 0.22 0.0484 Apr-91 27.79 -0.21 0.0441 May-91 27.94 -0.06 0.0036 Jun-91 28.16 0.16 0.0256 Jul-91 29.01 1.01 1.0201 Aug-91 28.87 0.87 0.7569 Sep-91 29.21 1.21 1.4641 Oct-91 28.76 0.76 0.5776 Nov-91 28.56 0.56 0.3136 Dec-91 28.34 0.34 0.1156 Jan-92 28.57 0.57 0.3249 Feb-92 28.39 0.39 0.1521 Mar-92 28.67 0.67 0.4489 670.01 -1.99 32.3417

The Mean Value of the index value is 27.9170 Variance = X'2/n-1, where n is the sample size (24) Standard Deviation () = Variance = 1.186

HYPOTHESIS TESTING

Chapter No.9

HYPOTHESIS TESTING

HYPOTHESIS TESTING
Hypothesis: 1 The hypothesis says that the net inflow of FII has appreciates the rupee value and depreciates the Exchange Rate dollar Vs INR. The Appreciation of rupee can be measure by calculating the regression line and coefficient of correlation of Net FII Inflow and the Exchange Rate.

Calculation of Coefficient of Correlation

By calculating the Coefficient of Correlation we can define the relationship of the two variables Exchange Rate and Net inflow of FII. Using the above tabulated values the coefficient of correlation is calculated to be r = 0.063 which denotes the two variables having a very low positive relationship with each other. The value of r2 = 0.004 or 0.40% that indicate the effect of the FII inflow has about 0.40% effect on Exchange Rate.

Hypothesis:

The hypothesis says that the inception of the investment of FII has increased the volatility of the Exchange Rate. The volatility can be measured by calculating the Standard Deviations () of the Exchange Rate before the investment allowed to FIIs and after the investment done by the same

Calculation of Standard Deviation :

For calculating the standard deviation of the Exchange Rate when there was no investment made by the FIIs, we have taken the time period of April 1990 to March 1992, total of 24 months observations, FIIs were allowed to invest in the Indian capital market since the financial year 1992-93 onwards. The mean index value of the Exchange Rate was calculated to be at 27.9170 By using the formula for calculating Standard Deviation () we get the value to be 1.186 The mean index value of Exchange Rate Since April 2003 to March 2010 is 44.872 and Standard deviation () is 2.650. The difference of the standard deviations of Exchange Rate before FII started investment in India and after FII started the investment in India is degree of effect on exchange rate. Investment of FII is not the only indicator of the volatility of the Exchange Rate.

There are more reasons as well:

A countrys exchange rate is typically affected by the supply and demand for that countrys currency in international exchange markets and this supply and demand affected by following reasons. 1. Rate of Interest 2. Rate of Inflation 3. Exchange rates are susceptible to political instability and anticipations about the new government. 4. Domestic Financial Market 5. Strong Domestic Economy 6. Economic Data like GDP & CPI 7. Stock Market also have correlation with Exchange Rate. 8. Balance of Trade 9. Government Budget Deficit and Surpluses 10. Any rumor in the markets also leads to fluctuation in the Exchange Rate. If we consider the volatility of the Exchange Rate has increased due to the above mentioned reasons to be 10%, still the new standard deviation is more than 27.9410+ 10% i.e..about 30.7351 Thus is quite obvious that the volatility of the Exchange Rate has increased since the inception of FII investment Therefore the hypothesis we constructed that the Net investment by FII has increased the volatility of the Exchange Rate holds true, hence proved. We can calculate the difference of the volatility of the Exchange rate (when FII investment was not done and when FII investment are made), through t-Test by applying suitable formula with the help of the two samples, their mean values and the standard deviations.

Chapter No.10

CONCLUSION

CONCLUSION

The study of FII net inflow has shown the positive correlation with the exchange rate. That means when the FII net inflow done then appreciates the Rupee Value and the exchange rate increase and vice versa.

The Net FII Inflow/Outflow has increases the volatility of exchange rate. It proves that Standard deviation of exchange rate before and after FII Inflow/Outflow. In this Analysis standard deviation more after the FII investment started in India.

Volatility of the exchange rate denotes to the ups & down in the exchange rate due to fluctuation of the FIIs.

Chapter No.11

LIMITATION

LIMITATIONS

1. The result obtained through the regression equation has not accurate. There is probability of occurrence of error. The error is known as the Standard Error denoted by the S.E. The standard error value is 2.62 in case of the regression equation of Net FII investment on Exchange Rate, Y=0.576x-18992,which indicates that the estimated FII investment for an expected Exchange Rate can be either more or loss by Rs.2.650 crore.

2. The relationship of FII investment and Exchange Rate denoted by the Coefficient of Correlation has a probable error with it. The value of Coefficient of Correlation is 0.063 and the probable error is 0.672 it can be increase or decrease an exchange rate by Rs. 0.672.

3. The calculated values are taken up to 3 decimal places only. Actual value can be changed if complete values are taken into account.

Chapter No.12

BIBLIOGRAPHY

BIBLIOGRAPHY

Book References: Statistical Methods Berry Research Methodology - C.R.Kothari. Foreign Exchange Management-D.Shivanandan Official Websites: National Stock Exchange (www.nseindia.com) Reserve Bank of India (www.rbi.org.in) Security and Exchange Board of India (www.sebi.gov.in) Ministry of Finance (www.financeministry.gov.in) www.google.com www.wikipedia.com