FII IMPACT ON INDIAN STOCK MARKET:

The liberalization process initiated in India in the early 1990s brought radical changes in the
functioning of the Indian stock market. Rising globalization, deregulation, and foreign
investments made the Indian stock exchanges competitive and efficient in their functioning.
Being a developing country, India attracts a large sum of FII every year. One of the most
dominant investor groups that have emerged to play a critical role in the overall performance of
the stock market is Foreign Institutional Investors (FIIs).In this regard, the role of investors is
thus the key to success of the market-guided economic system and since it is FIIs who pump
their savings into the markets, their investments need to be channelized to the most rewarding
sectors of the economy. Indian stock market, which is one of the indicators of the economic
status, is also affected by the foreign investments made. This portfolio flows by FIIs bring with
them a great advantage as they are engines of growth while lowering the cost of capital in the
emerging market. This paper indicates whether Foreign Institutional investors really have an
impact on the stock market of India.For any economy to grow it is important to have a
substantial amount of investments. Capital flows not only provide intensive economic growth but
also provide stability in the financial system of the country. However, these capital flows are not
without risk. The main risk posed by large and volatile capital flows is that they may result in
crisis and destabilize the economy. One such flow is Foreign Institutional Investments (FII).
Since 2000 the dealings in FII had largely increased due to more investors getting interest in the
Indian economy. Given the speculative nature of these flows, it is very important to analyse the
impact of FII flows on the Indian Economy in the last decade. The main purpose of this study is
to investigate the co-integration, causality, and shocks analysis between the Indian stock market
including different sectoral indexes and foreign institutional investment (FII) in India during
three different time spans: from 2001 to 2005, 2006 to 2009 and from 2010 to 2014. Engle-
Granger (1987) and Granger (1969) methodologies are used to investigate the co-integration and
causal relationship. Vector Autoregressive Regression (VAR) has been used to better understand
the causality, in terms of relative variance being explained and responses of shocks. Forecast
Error Variance Decomposition (FEVD) and Impulse Response Function (IMF) have been used
as a part of VAR model. The study found that relationship between Net FII flows and indexes are
of short-term nature and are significantly affected by many major events happening in the
economy. During 2006 to 2009 and 2010 to 2014, the volatility of response of shocks increases
in magnitude. Much of the variation and causation is explained during these two periods. Also
study has found that introduction of derivative market has significantly affected the Indian stock
exchange