An Assessment of FII Investment in Indian Capital Market

Transcription

1 An Assessment of FII Investment in Indian Capital Market Harendra Kumar Behera Abstract This paper reviews the policies for foreign portfolio investments and empirically assess the impact FIIs investments on Indian equity market. Particularly, the study tries to examine the effects of FIIs investment on equity return, stock market liquidity and volatility. Using monthly data and ordinarily least square, the study found that FIIs investments have a positive impact on both returns and liquidity. However, the GARCH estimates from daily data suggest FIIs investments increase volatility in Indian stock market. Key Words: Foreign Institutional Investment, GARCH, Liquidity, Volatility JEL Classification: G23, G12, C22 I. Introduction Investments by foreign institutional investors (FIIs) witnessed a marked expansion over the years. Ever since the opening of the Indian equity markets to foreigners, net FII investments have steadily grown from about Rs. 13 crores in to over Rs.66,000 crore in before it turning to a net disinvestment of Rs. 45,811 crore in , on an annual basis. In subsequent period, it increased sharply to Rs. 1,46,438 crore in With the increase in limit of FIIs investments in corporate debt and Government securities, the investments in debt component also increased significantly from Rs. 29 crore in to Rs.49,988 crore in , on an annual basis. This buoyant foreign investment flows into the country have continued to demonstrate the high level of confidence that the international investors repose in the Indian economy and as also norms for FII investments have been progressively relaxed. On the other hand, large reversal of FII inflows during global crisis, made balance of payments management difficult and led the Indian rupee to depreciate significantly. Apart from this, Indian The author is working as a Assistant Adviser in Monetary Policy Department of the Reserve Bank of India. The views expressed in the paper are those of the author and not of the institution to which he belongs. 1 Electronic copy available at:

2 stock market also witnessed large swings in the equity prices in the occasions of volatile movements of FII investments. The recent episodes of capital flows to the emerging market economies have been debated because of their abrupt movement and resulted impact on asset prices and exchange rates, and ultimately the impact transmitted to the real sector of the economy. It is also argued by critics of capital account liberalisation that international capital mobility may increase the probability of financial crisis (Reinhart and Reinhart, 2008). In case of volatile and short-term capital flows like FIIs investments, the risks are even higher. Recent liberalisation measures with respect to FIIs investments is viewed as compensating in some way for the relatively low capital inflows in other accounts like foreign direct investment (FDI) mainly to finance large current account deficit. Before liberalising further, it is essential to assess the impact of the policies undertaken so far. Whether they have served the purpose? Given the pro-cyclical nature and largely driven by global liquidity conditions, FIIs investments in India need to be monitor on a regular basis and their impacts necessitate proper assessment. Given the above backdrop, the consequences of such investments on the stock market become an important aspect of any study of capital inflows to a country. This paper briefly examines the effects of FII investment and study three of these consequences viz., liquidity, price discovery and volatility in some depth in the case of India. The uniqueness of this paper is use of FIIs investments in equity market rather than use of aggregate FIIs investments. Therefore, the empirical findings could be more reliable than the findings of earlier studies who have either used aggregate FII flows or aggregate FII investment data. The next section provides a comprehensive review of policies on FII investments in India. The effects of foreign investment including the brief literature is discussed in Section III followed by the empirical analysis in Section IV. The main findings of the paper and concluding remarks are furnished in final section. II. Review of Policies on Foreign Portfolio Investments in India India has initiated economic liberalisation on a selective basis during the mid-1980s by Rajiv Gandhi government. Until the beginning of 1990, however, the Indian economy was subject to a high degree of financial repression and was characterised by administered interest rates, large pre-emption of resources by the authorities, extensive micro-regulations directing the 2 Electronic copy available at:

3 major portion of the flow of funds to and from financial intermediaries, relatively opaque accounting norms and limited disclosure, and dominant public ownership. The unprecedented external payment crisis of 1990 forced India to go for significant liberalisation of its external account including the capital account. As a process of capital account liberalisation, the foreign institutional investors are also allowed to invest in the Indian capital markets. Effective September 14, 1992, foreign institutional investors (FIIs) were permitted to invest in any of the listed companies of Indian stock exchanges/over-the-counter exchanges subjected to the condition that aggregate holding of share/convertible debentures of the FIIs/NRIs/OCBs put together should not exceed 24 per cent of issued and paid-up capital of the company with the individual share of the FIIs not exceeding 5 per cent. The individual FII limit was increased from 5 per cent to 10 per cent since June 1998 and the ceiling for single FII was separated from that of a single NRI/PIO/OCB. Similarly, the aggregate limit for all FIIs, subsequently, increased to 30 per cent in April 4, 1997; to 40 per cent in March 1, 2000; 49 per cent in March 8, 2001; finally to sectoral cap/statutory ceiling effective September 20, 2001 to increase FII participation in Indian capital market. FIIs were initially allowed to invest in all securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies and mutual funds. Investment in dated government securities was permitted to FIIs since March 8, Gradually, they were also allowed to invest in unlisted securities, commercial paper and derivatives traded on a recognised stock exchange. FIIs have been provided freedom to purchase and sale in Indian capital market allocating their investments between debt and equity in the ratio of 70:30. From April 1998, FII investments were also allowed to investment in dated Government securities. For operational flexibility, any registered FII willing to make 100 per cent investment in debt securities are permitted to do so subject to specific approval from SEBI as a separate category of FIIs or sub-accounts as 100 per cent debt funds since November In April 1998, FIIs were permitted to invest in dated government securities subject to a ceiling of US$ 1 billion. However, the overall cap on investments in Government securities was revised from US$1 billion to US$1.75 billion in November, 2004; to US$2 billion in April 2006; to US$2.6 billion in January 2007; to US$3.2 billion in October 2007 and further to US$5.0 billion in June Effective October 2008, the limit further rose to US$6.0 billion to attract more capital flows under such 3

4 instruments. Similarly, FIIs were also allowed to investment in corporate debt instruments subject to a limit of US$ 0.5 billion in November 2004, which was enhanced to US$ 1.5 billion in April 2006 and further to US$ 3.0 billion in June 2008, and the current limit is US$ 15 billion since October Initially in 1992, entities such as asset management companies, nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) were allowed to be registered as FIIs. Under eligibility conditions, the definition of broad based funds was relaxed in August 1999 and in February 2000 and newer entities, such as foreign firms and high net-worth individuals were allowed to invest as sub-accounts. The policy framework for permitting FII investment was enjoined upon FIIs to obtain an initial registration with SEBI and also RBI s general permission under FERA. With coming into force of FEMA, 1999 in 2000, all the foreign exchange related transactions of FIIs were permitted by RBI and other issues are monitored/ regulated by the SEBI. There is no lock-in period for the remitting of the funds brought in, even in the case of preference shares acquired by the foreign investors. The taxation guidelines become transparent with a tax of 10 per cent and 30 per cent on long-term and short-term capital gains, respectively. Initially, FIIs were permitted to hedge their investments in debt instruments in India only with respect to currency risk. On June 11, 1998, forward cover to FIIs on their investment in equity was also allowed subject to the maximum of the difference in dollar terms between the market value of investment on June 11, 1998 converted at RBI reference rate and the market value of investment at the time of providing cover, or fresh inflows since June 11, Subsequently, in November, 2002, forward cover up to a maximum of 15 per cent of the outstanding position as on March 31, 1999 plus the increase in market value after March 31, 1999 was also permitted. With this 15 per cent limit liberalised to 100 per cent of portfolio value, FIIs have had unrestricted access to currency hedging from January 8, 2003 onwards. In June 1998, the proposed legal basis for trading in equity derivatives coincided with permission for FIIs to invest in equity derivatives. With the advent of trading in equity derivatives in June 2000, and permission albeit limited in the beginning to FIIs to participate in this market opened up further avenues for FIIs to hedge their positions in the spot market. In the Mid-Term Review of 4

5 Annual Policy , the Reserve Bank allowed FIIs to rebook 25 per cent of the cancelled forward contracts, provided such contracts are supported by underlying exposure. In view of the concerns expressed by the market participants in monitoring cancellations and rebooking within 25 per cent limit of the cancelled contracts, however, FIIs are allowed to cancel and rebook forward contracts up to 2 per cent of the market value of their investments effective February 8, Earlier, FIIs were not allowed to engage in short selling and were required to take delivery of securities purchased and give delivery of securities sold. Since December 31, 2007, FIIs and sub-accounts of FIIs were permitted to short sell, lend and borrow equity shares of Indian companies, subject to such conditions as may be prescribed in that behalf by the Reserve Bank and the SEBI / other regulatory agencies from time to time. Short sell is not permitted for equity shares which are in the ban list and / or caution list of Reserve Bank. A major steps taken to encourage foreign investment is allowing both FDI and FII investment in Commodity Exchanges subject to a composite ceiling of 49 per cent foreign Investment, with a FDI limit of 26 per cent and an FII limit of 23 per cent. Similarly, foreign investment including those of FIIs were allowed in Credit Information Companies with an overall limit of 49 per cent and with prior approval of FIPB and regulatory clearance from RBI. While all the above discussed liberalisation measures undertaken to encourage FII investment in India, in October 2007, SEBI reverted to the FII regulations of 2004 which allowed only regulated entities to invest in India through the participatory note (PN) route 1 in order to discourage speculative flows. Accordingly, FIIs and their sub-accounts were restricted to issue/renew PNs with underlying as derivatives. The FIIs who were issuing offshore derivative instruments (ODIs) with notional value of PNs outstanding (excluding derivatives) as a percentage of their Assets Under Custody (AUC) in India of less than 40 per cent allowed to issue further ODIs only at the incremental rate of 5 per cent of their AUC in India. Further, the FIIs issuing ODIs of outstanding notional value (excluding derivatives) exceeding 40 per cent were required to wind up the current position over 18 months. The restrictions on PNs were, however, removed effective October 7, In sum, the liberalisation policy for FIIs has taken 1 PNs are offshore derivative instruments (ODIs), issued against an underlying security, used by foreign funds, not registered in the country, for trading in the domestic market. PNs (as alternative to the sub-accounts) are like contract notes and are issued by FIIs, registered in the country, to their overseas clients who may not be eligible to invest in the Indian stock markets. 5

6 the form of (i) relaxation of investment limits for FIIs; (ii) relaxation of eligibility conditions; and (iii) liberalisation of investment instruments accessible for FIIs. III. How Foreign Portfolio Investments Can Affect? Each form of capital flows has a unique feature to affect growth. All types of capital flows do not have same impact on growth some have direct effect while others have indirect influence. For example, portfolio flows may indirectly impact growth by improving equity market development, corporate governance, etc. whereas FDI could contribute to growth directly through creation of physical capital. Thus, capital flows have differential impacts. Recognising these features, policy makers sequence the liberalisation process as per the requirement of their economy. It has been argued that equity flows have positive effects on growth while debt flows have either negative or no impact on growth. Further, some forms of capital flows, such as FII flows and short-term trade credits are considered to be more volatile in nature could impact the growth negatively. This study tries to examine whether FIIs investment in India has served its purpose for which reason we have allowed foreign investors participation in our capital market. More specifically, the effect of FIIs investments on Indian equity market has been examined in this study. FII investment is expected to achieve a higher degree of liquidity at stock markets, increase price-earning (PE) ratios and consequently reduce cost of capital for investment. FII investment is also expected to improve the functioning of the stock market as foreign portfolio investors are believed to invest on the basis of well-researched strategies and a realistic stock valuation. The portfolio investors are known to have highly competent analysts and access to a host of information, data and experience of operating in widely differing economic and political environments. Host countries seeking foreign portfolio investments are obliged to improve their trading and delivery systems which would also benefit the local investors. From the perspective of the FIIs, investments in various countries provide an excellent measure of portfolio diversification and hedging to take advantage of arbitrage opportunities. Notwithstanding these merits of FII flows, the Mexican crisis and more recently the East Asian crisis have highlighted the negative aspects of such flows and use of words like hot flows, reversible and short term 6

7 has become common in reference to these flows. Therefore, FII flows are often characterized by sudden and sharp reversals. Some argue that such reversals depend less on domestic fundamentals and more on the sentiment of foreign investors. The reversals could inflict substantial real costs on the economy. FII flows are generally more volatile as compared with other forms of investments and also associated with the fear of contagion in international financial markets. Thus, FII investment could either help in financial market development and reduction in cost of capital or could make the market volatile in the face of adverse developments in global financial markets. Merton(1987) s base broadening hypothesis postulates a positive and long term impact of foreign investment on stock prices due to reduction on risk premium from international diversification. However, according to Warther(1995) s price pressure hypothesis, the impact of foreign investment on stock prices, caused due to temporary increase in liquidity, is short term in nature and reversible. lf FIIs use positive feedback trading strategies, causality may also run from stock-prices to foreign investment (Badhani, 2005). The portfolio balancing efforts of foreign investors will also put pressure on demand (or supply) of the currency, which may affect its exchange rate. The empirical evidences on the effects of FII are limited in Indian context. Majumdar (2004) studied the impact on FII investment on stock market liquidity and volatility and found that FII flows have increased liquidity in the market but increased volatility in equity prices. Apart from this study, there is hardly any study who has examined in detail the direct impact of FII investments. Using monthly data from April 1993 to March 2004, (Badhani, 2005) found that there is long term relationship between FII flows and stock prices, and between FII flows and exchange rate; however, no long term relationship was found between exchange rate and stock-prices. He concludes that FIIs use positive feedback trading in respect to exchange rate but bi-directional long term causality between FII flow and stock prices provide the evidences of both 'base-broadening hypothesis' and 'positive feedback trading hypothesis'. Using both monthly and daily data Batra (2003) examined trading behaviour of FIIs and the impact of their trading biases on stock market stability. She found strong evidences of FIIs being positive feedback investors and trend chasers at the aggregate level on a daily basis, which was reverse in case of monthly data. She also found that foreign investors have a tendency to herd together in their trading activity in India and the trading behaviour and biases of the FIIs do not appear to have a destabilizing impact on the equity market. 7

8 Jan/93 Oct/93 Jul/94 Apr/95 Jan/96 Oct/96 Jul/97 Apr/98 Jan/99 Oct/99 Jul/00 Apr/01 Jan/02 Oct/02 Jul/03 Apr/04 Jan/05 Oct/05 Jul/06 Apr/07 Jan/08 Oct/08 Jul/09 Rs. Crore IV. Empirical Analysis In case of India, empirical evidence suggests that the FII flows are small as compared to other emerging markets but also relatively less volatile. The portfolio flows are determined by both external and domestic factors. Among external factors, LIBOR and emerging market stock returns are important, while the primary domestic determinants are the lagged stock return and changes in credit ratings (Gordon and Gupta, 2003). Since , when FIIs were allowed entry into Indian financial markets, FII investment had increased over the years. In tandem with the boom in stock markets and sound global scenario, investments by FIIs into India were quite high in last few years, particularly since However, saw the highest FII outflow in any financial year since inception. This could be attributed to the global financial meltdown and the home bias of FIIs in the crisis. As can be seen from Figure 1 that net FII investments and equity prices in terms of Sensex move together over the years with exception to years of 1999, 2000 and Figure 1: Movement of BSE Sensex and Net FII Investment in Equity Market Sensex (Left scale) Net FII Investment in equities

9 Effects of FII Investments on Liquidity and Equity Returns To examine the relationship of FII investments with stock market liquidity and equity prices the following model has been used: (1) where Y can be liquidity in stock market measured in terms of stock market capitalisation to GDP ratio (MCAP) or turnover ratio (TOR), i.e. total value of domestic shares traded divided by the market capitalisation, or can be equity prices; FII stands for gross FII equity investments in rupees crore or gross FII equity investments as percentage to GDP. We have used gross investments instead of net investments as the former only affects all the interested variables and turnover and market capitalisation are also in gross terms. The model is estimated taking the logarithm of the variables when they are rupees crore or equity prices. We have estimated the model separately for BSE and NSE variables. Data Monthly data on FII equity investments (purchases and sales) equities from SEBI website and constructed the FII variable by summing up purchases and sales to examine the impact of FII investments. The data on BSE Sensex, BSE monthly turnover, BSE market capitalisation from BSE website and NSE Nifty, NSE monthly turnover, NSE market capitalisation from NSE website. All the data are monthly in frequency and collected for the period April 1993 through March 2009 except NSE monthly turnover which is available since November Annual GDP at current market prices are taken from Hand Book of Statistics on Indian Economy to construct MCAP variable. A dummy variable (DUM) is used taking 1 for the months of June 2000 to February 2001 and 0 for other periods to capture the sudden significant rise in turnover during such period. In order to examine the volatility impact of FII investments, daily data on equity prices, i.e. BSE Sensex and NSE Nifty, and net FII investments in equity market in rupees crore, which are collected from the BSE website, NSE website and SEBI website, respectively. All the daily data are collected for the period April 1, 2002 to March 31, 2010 accounting for 1983 observations. 9

10 Estimated Results The stationarity property of the data are checked using different unit root tests and all the variables are found to be I(1). Therefore, the equation (1) is estimated using OLS and checked for the stationarity of estimated residuals to know about the cointegration. The estimated results are reported in Table 1. The table is divided in to four parts first two parts taking FII variable measure in rupees crores while the second part uses FII measure as a ratio to market capitalisation. Each part is further divided into two panels, i.e. Panel A presents the results using BSE data whereas Panel B reports the results using NSE data. is very high and DW is low in all the equation as the variables are I(1). However, the estimated residuals in all the equations are statistically significant at 5 percent level rejecting the null of unit root. Therefore, we considered the equation as the cointegrated equation and interpreted the results accordingly. In the first part of the table, it can be noted that the coefficient of FII investments is positive and statistically significant implying a positive impact on market capitalisation of both the exchanges BSE and NSE. Similarly, it can be seen that FII has positive and significant impact on equity prices, LBSE and LNSE 2. Since the ADF t-statistics is high indicating about a strong long-run relationship between equity prices and FII investments. This finding is similar to as observed earlier from the Figure 1. Thus, FII investments help in price discovery. The results are also similar when FII as measured as the ratio to market capitalisation as given in second part of the table. On the other hand, stock market liquidity measured in terms of TOR show an ambiguous result in the first part of the table though the impact of FII investment is positive and statistically significant in both the panels of the second part. In the first part, the coefficient is significant and negative for BSE while it is positive and insignificant for NSE. It may be noted that a similar result was found by Mazumdar (2004) taking first difference of TOR as dependent variable and 2 Using daily data for the period April 1, 2002 to March 31, 2010, we found a similar result using both gross as well as net FII investment. The results using net FII investments are given below as: DW = 0.55 & = 0.65; t-stat = (697.8) * (60.7) * t-stat = (640.8) * (60.7) * * indicates significant at 5 percent level. DW = 0.56 & =

11 FII equity flows. She found a statistically significant impact of FII investments on turnover ratio. However, she has not provided any explanation for it. This kind of result could be due to the herding behaviour of FIIs, which makes the market turnover (in terms of value) low during large outflows. When the liquidity measured in terms of market capitalisation show a significant and positive result. Thus, it is difficult to conclude saying FII investments increase stock market liquidity. However, FII investments help in price discovery. Notwithstanding this positive impact of FII investments on stock market liquidity and price discovery, it is possible that FII investment could make stock market more volatile as they are the price makers. To study the hypothesis of FII investments stock market volatility, we have employed GARCH techniques. Table 1: OLS Estimates of Impact of FII on Liquidity and Prices FII: Gross FII Investments in Rupees Crore Dependent Variable Constant t-stat FII t-stat DUM t-stat DW ADF Panel A: BSE MCAP * 5.16E * * TOR * -7.00E * * * LBSE * 1.13E * * Panel B: NSE MCAP * 4.83E * * TOR * 8.72E * * LNSE * 1.12E * * FII: Ratio of Gross FII Investments in Rupees Crore to Market Capitalisation in Rupees Crore Panel A: BSE MCAP * * * TOR * ** * * LBSE * * * Panel B: NSE MCAP * * * TOR * * * * LNSE * * * *,**: significant at 5% and 10% levels, respectively. 11

12 Effects of FII Investments on Equity Price Volatility The testable equation to study the impact of FII investment on stock market volatility using the appropriate symbols for the variables is given as below: (2) t 1 t ~ N (0, h t ) (3) where RET stands for returns on BSE Sensex or NSE Nifty indices (S t ) calculated as 100 (ln S t ln St 1) ; and FII stands for net FII equity investments in rupees crore. If FII investments increase stock market volatility, the coefficient of FII in the conditional variance equation, i.e. equation (3) needs to be positive and significant. We have used daily data on equity prices, i.e. BSE Sensex and NSE Nifty, and net FII investments in equity market in rupees crore, which are collected from the BSE website, NSE website and SEBI website, respectively. All the data are collected for the period April 1, 2002 to March 31, 2010 accounting for 1983 observations. Estimated Results The mean equation of the GARCH model, i.e. equation (2) is estimated as specified because the data fits well for AR(1) in our study. We have conducted all the pre-estimation diagnostic checks to check the presence of ARCH effect and property of data used in the exercise. The estimated ADF statistics of returns on BSE, NSE and FII investments are -35.4, and -3.75, respectively, in levels are higher than their critical values at 5 percent level of significance, confirming stationary at level. The summary of descriptive statistics of all the equity price returns along with the results of Ljung Box (LB) Q-Statistics and Lagrange Multiplier (LM) statistics to test the presence of ARCH effect are reported in Table 2. From the result in Table, it can be observed that all the returns are leptokurtic, i.e. fat tailed and therefore, the presence of ARCH effect in various return series are checked through LB-Q tests of squared errors from equation (2) up to 8 th lag. The ARCH-LM test is employed to see the serial 12

13 correlation in the squared errors from equation (2) to test the ARCH effect. All the tests confirmed the presence of ARCH effect in various return series. Table 2: Descriptive Statistics BSERET NSERET Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera * (0.00) * (0.00) Sum Sum Sq. Dev LB-Q (8) * (0.00) * (0.00) ARCH -LM (8) * (0.00) * (0.00) Observations Note: LB-Q and ARCH-LM are the Ljung-Box Q-statistics and Langrange Multiplier 2 statistics, respectively of squared errors in eq.(6.16) to reject the null of no arch effect. All the ARCH effect tests are conducted up to lag length 8. Figures in brackets at the right of various statistics are the p-values. After confirmation of ARCH effects, we have estimated GARC(1,1) model using net FII investment as independent variable in conditional variance equation. Though we have two equations, one each for the mean and variance, which are estimated together as a system, we have presented the results of variance equation only. The estimation conducted for both BSE and NSE returns and the results are presented in Table 3. The upper panel, i.e. Panel A report the results using BSE return in mean equation to estimate the volatility equation while Panel B report the same using NSE return. The post-estimation diagnostic checks are carried out which satisfies all the conditions. The signs of, and are all positive as expected. ARCH-LM 2 statistics are highly insignificant proves absence of further ARCH effects. The degree of persistence is tested using the Wald test in which the null hypothesis, 1 (alternatively known as, the variance is integrated or non-stationarity of the variance) is tested against the 13

14 alternative 1, using the estimated, coefficients from the variance equation. The Wald statistics are highly significant confirms the stability of the model. All these results confirm the adequacy of our GARCH (1,1) model. Panel: BSE Table 3: Parameter Estimates of GARCH Models Coefficient t-statistic P- value Constant Adjusted R-squared DW 2.01 Log likelihood AIC 3.56 ARCH LM 6.13 (0.63) # Wald Statistic * (0.00) # Panel B: NSE Coefficient t-statistic P- value Constant Adjusted R-squared DW 2.02 Log likelihood AIC 3.60 ARCH LM 3.63 (0.89) # Wald Statistic * (0.00) # * : Significant at 1% level; #: Figures in parenthesis are p-values. The results in the above table show that the coefficient of FII investment is positive and highly significant. However, the coefficient is very low in magnitude, i.e in case of BSE and percent in case of NSE. Therefore, a 1 crore increase in net FII investments could increase the stock market volatility by Thus, it may be concluded that FII investment increases stock market volatility in India. V. Main Findings and Concluding Remarks The policy towards liberalisation of portfolio investments was sequenced to allow the foreign investors in equity market first and then in debt market. The limit in FIIs investments on debt securities has been increased gradually. However, the pace is faster in recent few years. The 14

15 empirical result suggests FIIs investments in Indian capital market are contemporaneously correlated with the equity returns. In fact, the study found a positive impact of FII investment on stock returns. The results also suggest that FII investments also increase market liquidity during the period April 1993 to March However, FII investments are found to increase volatility in stock market in India as evidenced from GARCH estimation. More concise way, it may be said that FII investment in India improves stock market liquidity and helps in price discovery but increases stock market volatility. References Batra, A. (2003). The Dynamic of Foreign Portfolio Inflows and Equity Returns in India, Working Paper No. 109, ICRIER, New Delhi, September. Badhani, K.N. (2005) Dynamic Relationship among Stock-Prices, Exchange Rate and Net F.I.I. Investment Flow in India, Paper presented at The Conference on Research in Finance and Accounting Indian Institute of Management, Lucknow, December. Gordon, J. and P. Gupta (2003). Portfolio Flows into India: Do Domestic Fundamentals Matter? IMF Working Paper No. 03/20, Washington, D.C. Mazumdar, T. (2004). FII Inflows to India: Their Effect on Stock Market Liquidity and Volatility, The IUP Journal of Applied Finance, July, Merton, R.C. (1987). A Simple Model of Capital Market Equilibrium with Incomplete Information, Journal of Finance, 42, Reinhart, C.M. and V.R. Reinhart (2008). Capital Flow Bonanzas: An Encompassing View of the Past and Present, NBER Working Paper No , Cambridge, Mass. Warther, V.A. (1995). Aggregate Mutual Fund Flows and Security Returns, Journal of Financial Economics, 39,