This paper examines the relationship between foreign institutional investment and stock returns in India during
2002-04. The Foreign Institutional Investment as a percentage of market capitalization and floating stock has
been improving over the years. Using NSE Nifty and FII capital flows to the equity market, Granger-causality,
Cross-correlation method and GARCH have been applied to analyze the static and dynamic relationship
between FII flows and Nifty. Granger-causality shows a unidirectional relationship, indicating that equity
returns cause FII flows, whereas Cross-correlation method shows some evidence of contemporaneous and
bi-directional causality. This is an interesting result not reported earlier, and it is possible that the impact may
be strong at the level of individual stock prices. The Foreign Institutional Investors (FIIs) seem to be positive
feedback traders, as there is a strong positive relationship with lagged daily returns, and the results also show
a significant relationship with future equity returns. Individually, there is significant volatility clustering in FII
investments and Nifty series but there is no transmission or destabilizing effect. It is suggested that information
on trade by FIIs must be made publicly available more speedily.
India has emerged as an important destination for global investment. This is reflected in
the number of Foreign Institutional Investors (FIIs) registered with Securities and
Exchange Board of India (SEBI). FIIs registered with SEBI have increased from 492 in 1999
to 608 by September 2004. Foreign Institutional Investor means an institution established
or incorporated outside India, which proposes to make investment in India in securities.
Also, a domestic asset management company or domestic portfolio manager who manages
funds raised from outside India for investment in India on behalf of a sub-account shall
be deemed to be an FII. The liberalization process of the Indian economy has been a
contributing factor for the increase in financial flows. Financial flows may not be
contributing directly to productive capacity but they facilitate the transfer of funds to
enterprises with investment opportunities. India, in the last ten years, has improved its
macroeconomic performance with a shift towards more market discipline and increased
capital movements. This has led to a lowering of barriers for foreign investors through the
FII regulations in 1995. FIIs are registered with SEBI initially for a period of five years and
operate through establishing an office in India or through a sub-account with a local
company. Their daily transactions of buy and sell trades are reported to SEBI. All FIIs are
required to buy or sell only for delivery. They are not allowed to offset a deal nor are they
allowed to sell short. |
