Impact of Foreign Institutional Investors on Economic Growth

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1 Volume-6, Issue-3, May-June 2016 International Journal of Engineering and Management Research Page Number: Impact of Foreign Institutional Investors on Economic Growth 1,2 Dr. Satendra Kumar Yadav 1, Yogesh Kumar 2 Assistant Professor, Institute of Business Management, GLA University, Mathura, INDIA ABSTRACT Economies like India, which offer relatively higher growth than the developed economies, have gain favor among investors as attractive investment destinations for foreign institutional investors (FIIs). SEBI characterize FII: Means an establishment created outside India which proposes to make interest in India in securities. An investor or investment fund that is from or registered in a country outside of the one in which it is currentlyinvesting is known as Foreign Institutional Investment and investors are known as Foreign Institutional Investors. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. In this paper an effort has been made to develop an understanding of the investment decisions, trading strategies and behavior of the FIIs in the Indian equity market. Form this study and the findings we can conclude that FII S are the cause for the changes in the values of majority of macroeconomic variables, rather than an effect. The FII S flows experienced a great volatility in India. The macro economic variables namely interest rates, exchange rate, inflation rates; market position is creating an impressing influence on the foreign capital flows. The individual sectors performance is influencing the capital flows to great extent, if we compared to the macroeconomic variables. Keywords---- FIIs, SEBI, Portfolio, foreign capital inflows I. INTRODUCTION Foreign Institutional Investors (FIIs) were permitted to invest in all the listed securities traded in Indian capital market for the first time in September, As per the RBI, Report on Currency & Finance ( ), since 1991 there has been continuous move towards the integration of the Indian economy with world economy. Since then the regulations with regard to FIIs investment has become more liberal. As a result of abolishment of barriers to capital inflows in the form of FIIs investment, India attracted huge amount of foreign capital particularly from developed countries. The cumulative net investment by FIIs in Indian stock market since 1993 has crossed US$ 50 billion at the end of March 2007, (SEBI, annual report, ). International capital inflows have both positive as well as negative impact on the health of the recipient economy. On the positive side, these capital inflows raise the level of economic development by augmenting the domestic investment and widen financial intermediation. But these capital inflows also pose several threats to the domestic economic and financial system of the recipient economy like inflation, appreciation in exchange rate, overheating of the economy and possibility of sudden withdrawal. FIIs investment is volatile by nature and is often termed as hot money In the present paper, an effort has been made to estimate the determinants of foreign portfolio investment in India. In the light of huge and growing FIIs investment inflows to India, appropriate policy formulation is the need of the hour which will help in reducing the impact of possible threats and maximizing the benefits from the same to enhance economic and financial development. This in turn calls for the need to estimate the determinants of FIIs investment. Available empirical evidence suggests that FIIs inflows by and large are determined by the performance of stock markets and macroeconomic aggregates of the host country. Thus, FIIs investment is pulled toward an economy with sound macroeconomic factors, high returns, lesser risk and growing stock markets in terms of rising market capitalization and turnover. FIIs, give due consideration to risk-return characteristics in the home (source) country while investing in emerging markets. The profit booking tendency of FIIs depends on the difference in the home country risk-return and host country risk return. Besides this, official policies of the host and home country i.e. degree of financial liberalization, also determine the size of FIIs inflows. 418 Copyright Vandana Publications. All Rights Reserved. II. NEED OF THE STUDY The Foreign Institutional Investors (FIIs) have risen as vital players in the Indian stock exchange and their developing commitment includes as a critical highlight of the improvement of securities exchange in India. To encourage outside capital streams, creating nations have been encouraged to reinforce their stock exchange. Outside capital has huge part for each national economy, paying little heed to its level of advancement.

2 For the created nations it is important to backing practical improvement. For the creating nations, it is utilized to expand gathering and rate of ventures to make conditions for more serious financial development. For the move nations, it is helpful to complete the changes and cross to open economy, to cross the past long haul issues and to make conditions for steady and persistent development of GDP, and also mix in world economy. III. LITRATURE REVIW Author Name M.S.Ramaratnam, R.Jayaraman and V. Krishnamoorthy ANAND BANSAL, J.S. PASRICHA YEAR 2011 The paper examined the inter-linkage between the net FII investment and stock market by applying linear regression model indicating that there is significant impact of FIIs on the BSE- Sensex and further the study finds that there is a good relationship between the variables of FII investment made by FIIs significantly differs in terms of equity and debt segment. A nation's development is controlled by its venture towards the infrastructural advancement and the business execution. Money markets go about as a scaffold in acquiring the trusts from the speculator and the same is used with the end goal of modern development and thus brings about corporate development. Regularly stock exchange files show good and bad times concerning their development because of the value vacillation and the cost of the script is worked under economic situation i.e. request and supply considers IMPACT OF FIIS INVESTMENT FLOWS ON STOCK PRICES RETURN In this Paper tells about that it can be said that while return declined reasonably after the entry of FIIs, the volatility has been reduced significantly after their entry. Besides, FIIs investment flows, there may be other reasons as well that may have some degree of influence on market volatility and return. While the FIIs investment flows and contemporaneous SENSEX, NIFTY, market capitalization and market turnover have been strongly correlated in India, the correlation between FIIs investments and market volatility and market return has been comparatively low. It means volatility in Indian market is not the function of FIIs investment flows. There may be some other reasons which induced the volatility in Indian market over the time. Aswini A. and Mayank Kumar 2014 The objective of this study is to find out the significant relation between the FII and the Indian stock market (NSE)The analysis has been started by taking the past 10 years closing index of NIFTY and the FII into India that is from the year 1993 to 2013 to understand the correlation between the stock market changes in relation to the FII.NSE, BSE etc. and the FII data have been taken from the GOI report. A descriptive study has been done to validate the null hypothesis of association between FII and 419 Copyright Vandana Publications. All Rights Reserved.

3 Stock Market. This study has collected the yearly closing stock of NSE & BSE and FII values of last 10 years ( ). This study has used chi-square as a statistical tool to validate the null hypothesis of association between stock market value and FII. RAJESH CHAKRABARTI 2001 A collection of domestic and international variables likely to affect both flows and returns fails to diminish the importance of contemporaneous returns in explaining FII flows. Since the US and world returns are not significant in explaining the FII flows, there is no evidence17 of any informational disadvantage of FIIs in comparison with the domestic investors in India. Changes in country risk ratings for India do not appear to affect the FII flows. The beta of the Indian market with respect to the S&P 500 index (but not the beta with respect to the MSCI world index) seems to affect the FII flows inversely but the effect disappears in the post Asian crisis period. There appears to be significant differences in the nature of FII flows before and after the Asian crisis. In the post Asian crisis period it seems that the returns on the BSE National Index have become the sole driving force behind FII flows. Peeush Ranjan Agrawal and Tanu Agarwal 2015 FIIs do now purchase cautiously for a longer presence and have not opted out of India under distress, is a major shift in its investment approach. Indian Mutual Fund Industry has failed to lead market Sensex, leaving it to mercy of FIIs. Foreign exchange rate of Indian Rupee bears now an added independent variable to be discounted before, in a post Subprime crisis scenario. Fundamentalsof market like IIP remain crucial to investment decision. In this PaperThe trends have settled down to stability during to , to or to in overall period of seven years Harsh Vardhan and Pankaj Sinha 2014 The large time frame was subdivided in sub periods due to existence of structural breaks confirmed by the usage of different statistical tests as inferences drawn from VAR model is valid for the constant parameter regime. Different VAR models for derived sub - periods provided interesting results indicating statistically significant relationships. It was observed that FIIs inflows and out flows are significantly influenced by the returns in the domestic equity market.net inflows dependence on equity market returns indicates daily return chasing behavior on the short term by the Foreign Institutional Investors. The existence of bi-directional causality for Sensex 420 Copyright Vandana Publications. All Rights Reserved.

4 return and net FIIs means market information efficiency hypothesis may be rejected; at the same time it confirms base broadening hypothesis. By the usage of Generalized Impulse Function, Variance Decomposition and Granger causality test; it was found that the change in the exchange rate has no effect on the inflows of FIIs; however out flows are influenced by the change in the exchange rate. SENSEX returns bring about change in the exchange rates and change in the exchange rates affects outflow of FIIs. Prof. A.Q Khan and Sana Ikram 2010 This paper tests the efficiency of the Indian Capital Market in its semi-strong form of Efficient Market Hypothesis (EMH). The efficiency is tested in relation to the impact of Foreign Institutional Investors (FII s) largely on the Indian Capital Market. For the purpose, two major stock indices; National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) that represent the Indian Capital Market have been taken. Monthly averages of NSE & BSE and Monthly FII s net investment have taken over the period 1st April 2000 to 30th April 2010 in order to test the efficiency of Indian Capital Market. ManjinderKAUR,Sharanjit S. DHILLON 2010 The present study aims at exploring the determinants of Foreign Institutional Investors (FIIs) investment in India. Returns on Indian stock market have positive impact whereas US stock market returns have no significant influence on FIIs investment to India. Stock market risk has negative influence on FIIs inflows to India. Market capitalization and stock market turnover of India have significant positive influence only in short-run. Among macroeconomic determinants, economic growth of India has positive impact on FIIs investment both in long-run and short run. But all other macroeconomic factors have significant influence only in long-run like inflation in US has positive influence whereas inflation in India has negative influence on FIIs investment. Further, US interest rate has adverse impact on FIIs investment while liberalization policies of India exhibited significant contribution to FIIs inflows. IV. OBJECTIVES OF RESEARCH To analyze relationship between the FII and selected macro-economic variables in India. To analyze relationship between the FII the Indian stock market V. RESEARCH METHODOLOGY RESEARCH DESIGN Descriptive research design is used in this study because it will ensure the minimization of bias and maximization of reliability of data collected. Descriptive study is based on some previous understanding of the topic. Research has got a very specific objective and clear cut data requirements. The researcher had to use fact and information already available through financial statements of earlier years and analyze these to make critical evaluation of the available material. Hence by making the type of the research conducted to be both Descriptive and Analytical in nature. From the study, 421 Copyright Vandana Publications. All Rights Reserved.

5 the type of data to be collected and the procedure to be used for this purpose were decided. SECONDARY DATA It is the data which is already collected by someone else. Researcher has to analyze the data and interprets the results. It has always been important for the completion of any report. It provides reliable, suitable, adequate and specific knowledge. ANALYTICAL TOOL APPLIED In this paper we analyze the impact FII on selected macroeconomic variables and stock market, for that we use the following statistical tools and graphical tools. Statistical tools: Regression Graphical tools: Combo chart VI. DATA ANALYSIS & INTERPRETATION Interpretation Since Null hypothesis is accepted. Because P-value is >.05 and the r 2 is it means the impact on GDP is 6.5% of FII. H0 There is no significance impact on GDP. Interpretation: - The FII S are no so many effects to GDP values and GDP also no so many depend on FII S. 422 Copyright Vandana Publications. All Rights Reserved.

6 Interpretation Since Null hypothesis is rejected. Because P-value is <.05 and the r 2 is it means the impact on IIP is 52.2% of FII. H0 There is no significance impact on IIP. Interpretation: - The FII S are very opposite theiipvalues and same applicable for the values of IIP which are opposite and fluctuating to the FII S values. 423 Copyright Vandana Publications. All Rights Reserved.

7 Interpretation Since Null hypothesis is accepted. Because P-value is >.05 and the r 2 is it means the impact on exchange rate is 17.7% of FII. H0 There is no significance impact on exchange rate. Interpretation: - The values of FII are much more volatile than the values of exchange rates during the tenure. And there is no visibility of interdependency in between of both variables. 424 Copyright Vandana Publications. All Rights Reserved.

8 Interpretation Since Null hypothesis is accepting. Because P-value is >.05 and the r 2 is it means the impact on CNX NIFTYis 34.6% of FII. H0 There is no significance impact oncnx NIFTY. Interpretation: - The FII S are very much sensitive to CNX NIFTY values and same applicable for the values of CNX NIFTY which are sensitive to the FII S values. 425 Copyright Vandana Publications. All Rights Reserved.

9 Interpretation Since Null hypothesis is accepting. Because P-value is >.05 and the r 2 is it means the impact on S&P BSE SENSEXis 36.6% of FII. H0 There is no significance impact on S&P BSE SENSEX. Interpretation: - The FII S are very much sensitive to S&P BSE Sensex values and same applicable for the values of S&P BSE Sensex which are sensitive to the FII S values. 426 Copyright Vandana Publications. All Rights Reserved.

10 VII. FINDINGS OF THE STUDY It was found that FII S to be the important factor for an Emerging market economy s performance as a whole. For FII S foreign exchange reserves and exchange rates are also very important factor. The major investment strategies followed by FII S is they are positive feedback trader, invest for short term, prefer blue chip firm and have herd mentality. It was found that combined effect of macroeconomic variables and stock market parameters is more than their individual effects. The effect of sectoral indices was relatively high. IIP and exchange rates were found to be the cause for FII flows to India. VIII. LIMITATIONS OF STUDY This research is based on the secondary data. It is evident that the Sensex has increased when there are positive inflows of FIIs and there were decrease in Sensex when there were negative FII inflows. As the time available is limited and the subject is very vast the study is mainly focused on identifying whether there does exist a relationship between FIIs and Indian Equity Stock Market. It is mainly based on the data available in various websites. The inferences made are purely from the past year s performance. As the time available is limited and the subject is very vast. The study is general. It is mainly based on the data available in various websites &other secondary sources The inferences made is purely from the past year s performance IX. CONCLUSION Form this study and the findings we can conclude that FII S are the cause for the changes in the values of majority of macroeconomic variables, rather than an effect. The FII S flows experienced a great volatility in India. The macro economic variables namely interest rates, EXCHANGE RATE, inflation rates; MARKET position is creating an impressing influence on the foreign capital flows. The individual sectors performance is influencing the capital flows to great extent, if we compared to the macroeconomic variables. REFERENCES DATA SOURCE [1] [2] [3] [4] [5] dbie.rbi.org.in 427 Copyright Vandana Publications. All Rights Reserved.