Relation Between FII Flows & BSE Stocks

RELATIONSHIP BETWEEN FII FLOWS AND SENSEX
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DISSERTATION
ON
RELATIONSHIP BETWEEN FII FLOWS AND

SENSEX
Submitted in partial fulfillment of the requirement for

MBA Degree of Bangalore University
BY
DEEPA KUNDNANI
Register Number: 06XQCM6019
2006-2008
Under the guidance of

Prof. Dr. Nagesh S Malavalli
M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan
Bangalore-560001
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M P BIRLA INSTITUTE OF MANAGEMENT 1

________________________________________________________________________
DECLARATION
I hereby declare that the report titled “RELATIONSHIP

BETWEEN FII FLOWS AND INDIAN SENSEX”
prepared under the guidance of Prof. Dr. Nagesh S
Malavalli in partial fulfillment of MBA degree of
Bangalore University, and is my original work. This project
does not form a part of any report submitted for degree or
diploma of Bangalore University or any other university.
Place: Bangalore Deepa Kundnani

Date: Register No. : 06XQCM6019
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________________________________________________________________________
PRINCIPAL’S CERTIFICATE
This is to certify that Miss Deepa Kundnani, bearing Registration

No: 06XQCM6019 has done a project and has prepared a report
“RELATIONSHIP BETWEEN FII FLOWS AND SENSEX”
under the guidance of Prof. Dr. Nagesh S Malavalli, M P Birla
Institute of Management, Bangalore. This has not formed a basis
for the award of any degree/diploma for any other university.
Place: Bangalore Dr.Nagesh.S.Mallavalli

Date: PRINCIPAL
MPBIM, Bangalore
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________________________________________________________________________
GUIDE’S CERTIFICATE
I hereby declare that the research work done in this dissertation

entitled “RELATIONSHIP BETWEEN FII FLOWS AND
SENSEX” has been undertaken and completed by Miss Deepa
Kundnani under My guidance and supervision. I also certify that
she has fulfilled all the requirements under the covenant governing
the submission of dissertation to the Bangalore University for the
award of MBA Degree.
Place: Bangalore Prof. Dr.Nagesh.S.Mallavalli

Date: Internal guide
MPBIM, Bangalore
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ACKNOWLEDGEMENT
The successful accomplishment of any task is incomplete without

acknowledging the contributing personalities who assisted,
inspired and lead us to visualize the things that turn them into
successful stories for our successors.
First, I thank the Almighty God for his grace bestowed on me
throughout this project.
My special thanks to my project guide Prof Dr. N. MALAVALLI

SIR, who guided me with the timely advice and expertise and
helped us complete the project early.
Last, but not the least, I would like to thank my teachers, my

parents and all my friends for their wholehearted support and
encouragement.
DEEPA KUNDNANI
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RESEARCH EXTRACT
This report investigates the relationship between net foreign institutional

investment (FII) flows in India and sensex. For this purpose, monthly data
for the period January 2000 to March 2008 is analyzed. The analysis of data
is done by using Regression and T- test to check whether there is any
relationship between net foreign institutional investment (FII) flows in India
and sensex. The data required for understanding are collected from the
websites like wwww.bseindia.com, www.moneycontrol.com,
www.sebi.gov.in etc.
FII’s flow from January 2000 to March 2008 and sensex data also from
January 2000 to March 2008 are analyzed. To find the relationship between
FII flows and Sensex, Regression analysis is done.
In this research, T- Test is used for testing the hypothesis. Null hypothesis
i.e. H0 is that there is no difference between Actual and Estimated change in
sensex and alternative hypothesis i.e. H1 is that there is difference between
Actual and Estimated sensex change.
The major conclusion after data analysis was that the FII flows are highly
correlated with sensex. From T test it can be concluded that there is not
much difference between Actual and Estimated change in sensex.
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TABLE OF CONTENTS
PAGE
CHAPTER PARTICULARS No.
1 INTRODUCTION 4
1a. Background 5
1b. Statement of Problem 24
1c. Need of Study 24
1d. Objective of Study 24
2 REVIEW OF LITERATURE 25
2a. Purpose 26
2b. Methodology Followed by author 26
3 METHODOLOGY 28
3a. Type of Research 29
3b. Data Collection Area 29
3c. Sample Size 29
3d. Data Collection Tools 29
3e. Research Limitations 29
3f. Tools Used for Testing 30
4 PRESENTATION AND ANALYSIS
OF DATA 35
4a. Hypothesis 36
4b. Table: Presentation of Data 36
5 CONCLUSION 39
BIBLIOGRAPHY 41
APPENDIX 44
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LIST OF TABLES
PAGE
TABLE PARTICULARS No.
1 REGRESSION STATISTICS 37
2 CALCULATION OF 38
ESTIMATED VALUE OF
SENSEX
3 T – TEST 39
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1a. BACKGROUND OF THE STUDY
Foreign Institutional Investor (FII) is an investor - mostly of the form of

an institution or entity, which invests money in the financial markets of a
country different from the one where in the institution or entity was
originally incorporated.
In countries like India, statutory agencies like SEBI have prescribed norms
to register FIIs and also to regulate such investments flowing in through
FIIs.
The number of foreign institutional investors (FIIs) registered with the

Securities and Exchange Board of India (Sebi) has increased to 1,219 at the
end of 2007 as against less than 1000 at the end of 2006.
FIIs showed huge interest in 2007, pumping in the highest ever net
investment of US$ 17.2 billion in the equity markets and were instrumental
in the BSE and NSE clocking record index levels of over 20,000 and 6,000
respectively. In fact, during the year, FIIs were net buyers in 10 out of 12
months, turning net sellers in the rest primarily to make up the losses on
account of the sub-prime crisis in the US.
Out of the total net inflows, a whopping 70 per cent was invested through
the instruments of FCCBs, QIPs and IPOs. The remaining 30 per cent was
invested through overseas offers, preferential offers and conversion of
warrants.
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Some investment highlights:
The Indian growth story has attracted global majors like CLSA, HSBC,
Citigroup, Merrill Lynch, Crown Capital, Fidelity, Goldman Sachs, Morgan
Stanley, UBS, T Rowe Price International, Capital International and ABN
Amro among others to enter the Indian financial market.
• Goldman Sachs and Macquarie have acquired a 20 per cent stake each
in PTC India Financial services Ltd.
• Temasek Holdings, Investment Corporation of Dubai, Goldman
Sachs, Macquarie, AIF Capital, Citigroup and India Equity Partners
(IEP) have picked a combined stake of 10 per cent in Bharti Infratel.
• An entity of Merrill Lynch has picked up 49 per cent stake in seven
residential projects of real estate major, DLF.
• Blackstone has taken up a 26 per cent stake in MTAR Technologies.
• Citigroup, Morgan Stanley, Goldman Sachs and BSMA have picked
up a combined stake of over seven per cent in Gitanjali Gems.
• Fidelity Investments International has picked up close to seven per
cent equity in Transport Corporation of India (TCI).
FIIs are allowed to invest in the primary and secondary capital markets in
India through the portfolio investment scheme (PIS). Under this scheme,
FIIs can acquire shares/debentures of Indian companies through the stock
exchanges in India.
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The ceiling for overall investment for FIIs is 24 per cent of the paid up
capital of the Indian company. The limit is 20 per cent of the paid up capital
in the case of public sector banks, including the State Bank of India.
The ceiling of 24 per cent for FII investment can be raised up to sectorial
cap/statutory ceiling, subject to the approval of the board and the general
body of the company passing a special resolution to that effect.
To further increase FII participation in the Indian market, the Government

and Sebi have agreed to allow foreign individuals, corporate and other
investors to register directly as foreign institutional investors - a move
designed to increase transparency and reduce transaction costs for these
investors.
Sebi has also hiked the total permissible investment limit in government and
corporate debt to US$ 4.1 billion from US$ 3.5 billion. While the limit in
corporate debt remains unchanged, FII investment limit in government
securities has been increased to US$ 2.6 billion from US$ 2 billion.
Also, institutional investors including FIIs and their sub-accounts have been
allowed to undertake short selling, lending and borrowing of Indian
securities from February 1, 2008.
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COUNTRY-WISE BREAKUP OF FII IN INDIA
Country-wise FII Breakup (Dec- 2007)
2%
3% 2%
3%
3%
US
4%
UK
Luxembourg
4%
Singapore
43%
Austrailia
4%
Hong Kong
Canada
6% Ireland
Netherland
Mauritius
Switzerland
8%
France
18%
Source: www.sebi.gov.in
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Dominant Players
The FII investments have been the corner stone in the phenomenal rise of the
Indian stock markets. According to a study by Citigroup Research, the
holding of FIIs in Indian companies exceeds that of domestic financial
institutions, including mutual funds and insurance companies, retail and high
net worth investors all put together.
According to the study, while the value of FII equity holdings was US$ 193
billion by June 2007, equity assets held by domestic mutual funds are worth
less than a fifth that amount at US$ 38.17 billion.
Similarly, while FIIs held about 22 per cent of BSE 500 companies up
substantially from 12 per cent in March 2001 the other groups of investors
cumulatively have a 19.8 per cent holding in these companies. FIIs also held
26.9 per cent of the companies comprising the Sensex.
This scenario continued for the rest of the year. The total investment of FIIs
in Indian stocks was almost ten times that of the net investment of the
domestic mutual funds. Total net investments of FIIs amounted to about
US$ 17.2 billion at the end of 26 December, 2007 as against about US$ 1.7
billion by the domestic mutual funds.
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May 2004 and May 2006, has some common thing to say to the history of
Indian Stock Market. On May 2006, Global concerns over rising interest
rates in the US and sustained FII outflows continued to take its toll on the
market, dragging down the sensex to a three and-a-half month low. Despite
strong GDP growth and early onset of the monsoon, the mood remained
extremely bearish as FIIs remained major sellers amid hints of a further rise
in interest rates in the wake of inflationary trend in the US.
To what extent the stock market can internalize or capture the information
on these is a case in point. It may increase the possibility of capital flow
reversals. The present study focuses on this issue in the Indian context. In
fact, from among the whole gamut of institutional reforms undertaken in
India since the 1990’s, gradual abolishment of capital inflow barriers and
foreign exchange restrictions, adoption of more flexible exchange rate
arrangements deserve a special attention at this juncture to reexamine
whether India is approaching towards achieving the twin goals of stability
and efficiency of the financial system .
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BOMBAY STOCK EXCHANGE SENSITIVE INDEX
BSE Sensex
The Bombay Stock Exchange
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The BSE Sensex or Bombay Stock Exchange Sensitive Index or BSE 30

is a value-weighted index composed of 30 stocks with the base April 1979 =
100. It consists of the 30 largest and most actively traded stocks,
representative of various sectors, on the Bombay Stock Exchange. These
companies account for around one-fifth of the market capitalization of the
BSE.
Sensex milestones
Here is a timeline on the rise and rise of the Sensex through Indian stock
market history.
• 1000, July 25, 1990 - On July 25, 1990, the Sensex touched the four-
digit figure for the first time and closed at 1,001 in the wake of a good
monsoon and excellent corporate results.
• 2000, January 15, 1992 - On January 15, 1992, the Sensex crossed
the 2,000-mark and closed at 2,020 followed by the liberal economic
policy initiatives undertaken by the then finance minister and current
Prime Minister Dr Manmohan Singh.
• 3000, February 29, 1992 - On February 29, 1992, the Sensex surged
past the 3000 mark in the wake of the market-friendly Budget
announced by the then Finance Minister, Dr Manmohan Singh.
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• 4000, March 30, 1992 - On March 30, 1992, the Sensex crossed the
4,000-mark and closed at 4,091 on the expectations of a liberal
export-import policy. It was then that the Harshad Mehta scam hit the
markets and Sensex witnessed unabated selling.
• 5000, October 11, 1999 - On October 8, 1999, the Sensex crossed the
5,000-mark as the BJP-led coalition won the majority in the 13th Lok
Sabha election.
• 6000, February 11, 2000 - On February 11, 2000, the infotech boom
helped the Sensex to cross the 6,000-mark and hit and all time high of
6,006.
• 7000, June 21, 2005 - On June 20, 2005, the news of the settlement
between the Ambani brothers boosted investor sentiments and the
scrips of RIL, Reliance Energy, Reliance Capital and IPCL made huge
gains. This helped the Sensex crossed 7,000 points for the first time.
• 8000, September 8, 2005 - On September 8, 2005, the Bombay Stock

Exchange's benchmark 30-share index -- the Sensex -- crossed the
8000 level following brisk buying by foreign and domestic funds in
early trading.
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• 9000, December 09, 2005 - The Sensex on November 28, 2005

crossed 9000 to touch 9000.32 points during mid-session at the
Bombay Stock Exchange on the back of frantic buying spree by
foreign institutional investors and well supported by local operators as
well as retail investors.
• 10,000, February 7, 2006 - The Sensex on February 6, 2006 touched

10,003 points during mid-session. The Sensex finally closed above the
10K-mark on February 7, 2006.
• 11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed
11,000 and touched a peak of 11,001 points during mid-session at the
Bombay Stock Exchange for the first time. However, it was on March
27, 2006 that the Sensex first closed at over 11,000 points.
• 12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed
12,000 and touched a peak of 12,004 points during mid-session at the
Bombay Stock Exchange for the first time.
• 13,000, October 30, 2006 - The Sensex on October 30, 2006 crossed
13,000 and still riding high at the Bombay Stock Exchange for the
first time. It took 135 days to reach 13,000 from 12,000. And 124
days to reach 13,000 from 12,500. On 30th October 2006 it touched a
peak of 13,039.36 & closed at 13,024.26.
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• 14,000, December 5, 2006 - The Sensex on December 5, 2006

crossed 14,000 and touched a peak of 14028 at 9.58AM(IST) while
opening for the day December 5, 2006.
• 15,000, July 6, 2007- The Sensex on July 6, 2007 crossed another

milestone and reached a magic figure of 15,000. it took almost 7
month and 1 day to touch such a historic milestone.
• 16,000, September 19, 2007- The Sensex on September 19, 2007

crossed the 16,000 mark and reached a historic peak of 16322 while
closing. The bull hits because of the rate cut of 50 bps in the discount
rate by the Fed chief Ben Bernanke in US.
• 17,000, September 26, 2007- The Sensex on September 26, 2007

crossed the 17,000 mark for the first time, creating a record for the
second fastest 1000 point gain in just 5 trading sessions. It failed
however to sustain the momentum and closed below 17000. The
Sensex closed above 17000 for the first time on the following day.
Reliance group has been the main contributor in this bull run,
contributing 256 points. This also helped Mukesh Ambani's net worth
to grow to over $50 billion or Rs.2 trillion. It was also during this
record bull run that the Sensex for the first time zoomed ahead of the
Nikkei of Japan.
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• 18,000, October 9, 2007- The Sensex crossed the 18k mark for the
first time on October 9, 2007. The journey from 17k to 18k took just 8
trading sessions which is the third fastest 1000 point rise in the history
of the sensex. The sensex closed at 18,280 at the end of day. This 788
point gain on 9th October was the second biggest single day absolute
gains.
first time on October 15th 2007. It took just 4 days to reach from 18k
to 19k. This is the fastest 1000 points rally ever and also the 640 point
rally was the second highest single day rally in absolute terms. This
made it a record 3000 point rally in 17 trading sessions overall.
first time with a massive 734.5 point gain but closed below the 20k
mark. It took 11 days to reach from 19k to 20k. The journey of the last
10,000 points was covered in just 869 sessions as against 7,297
sessions taken to touch the 10,000 mark from 1,000 levels. In 2007
alone, there were six 1,000-point rallies for the Sensex.
• 21,000, January 8, 2008 - The Sensex opened with a huge positive

gap of 157 points at 20,970, and rallied past the 21,000-mark to a
fresh all-time high of 21,078.
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• 15,000, March 13, 2008 - Major setback was witnessed on the

bourses on 13 March 2008 as share prices fell almost across the board.
The 30-share BSE Sensex slumped 770.63 points or 4.78% at
15,357.35. Sensex hit a low of 15,228.99 in late trade, its lowest level
since early September 2007.
Major crashes since 2000
May 2006
On May 22, 2006, the Sensex plunged by 1100 points during intra-day
trading, leading to the suspension of trading for the first time since May 17,
2004. The volatility of the Sensex had caused investors to lose Rs 6 lakh
crores ($131 billion) within seven trading sessions. The Finance Minister of
India, P. Chidambaram, made an unscheduled press statement when trading
was suspended to assure investors that nothing was wrong with the
fundamentals of the economy, and advised retail investors to stay invested.
When trading resumed after the reassurances of the Reserve Bank of India
and the Securities and Exchange Board of India (SEBI), the Sensex managed
to move up 700 points, still 450 points in the red.
The Sensex eventually recovered from the volatility, and on October 16,
2006, the Sensex closed at an all-time high of 12,928.18 with an intra-day
high of 12,953.76. This was a result of increased confidence in the economy
and reports that India's manufacturing sector grew by 11.1% in August 2006.
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Effects of the sub prime crisis in the US
On July 23, 2007, the Sensex touched a new high of 15,733 points. On July
27, 2007 the Sensex witnessed a huge correction because of selling by
Foreign Institutional Investors and global cues to come back to 15,160
points by noon. Following global cues and heavy selling in the international
markets, the BSE Sensex fell by 615 points in a single day on August 1,
2007.
Participatory notes issue
On October 16, 2007, SEBI (Securities & Exchange Board of India)

proposed curbs on participatory notes which accounted for roughly 50% of
FII investment in 2007. SEBI was not happy with P-notes because it was not
possible to know who owned the underlying securities, and hedge funds
acting through P-notes might therefore cause volatility in the Indian markets.
However the proposals of SEBI were not clear and this led to a knee-jerk
crash when the markets opened on the following day (October 17, 2007).
Within a minute of opening trade, the Sensex crashed by 1744 points or
about 9% of its value - the biggest intra-day fall in Indian stock markets in
absolute terms till then. This led to automatic suspension of trade for 1 hour.
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Finance Minister P. Chidambaram issued clarifications, in the meantime,

that the government was not against FIIs and was not immediately banning P
Notes. After the market opened at 10:55 AM, the index staged a comeback
and ended the day at 18715.82, down 336.04 from the last day's close.
This was, however not the end of the volatility. The next day (October 18,
2007), the Sensex tumbled by 717.43 points — 3.83 per cent — to 17998.39.
The slide continued the next day when the Sensex fell 438.41 points to settle
at 17559.98 at the end of the week, after touching the lowest level of that
week at 17226.18 during the day.
After detailed clarifications from the SEBI chief M. Damodaran regarding

the new rules, the market made a 879-point gain on October 23, thus
signaling the end of the PN crisis.
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March 2008
The BSE Sensex tumbled 951.03 points or 6.03% to 14,809.49, registering

its second biggest single day point loss on 17th March, 2008.
It was also Sensex second biggest single day fall in percentage terms.
BSE Sensex fall of 1,408.35 points or 7.41% to 17,605.35 on 21 January

2008 is its biggest ever fall in record.
The market slumped on 17.03.2008 as the fire sale of ailing US bank Bear
Stearns and the Federal Reserve's emergency cut in its discount rate
intensified concerns that there could be more victims of the global credit
crisis.
The fifth-largest US investment bank Bear Stearns said on Friday, 14 March

2008, its liquidity position had deteriorated significantly in the last 24 hours
and a cash crunch forced it to turn to the Federal Reserve and JP Morgan
Chase for emergency funds. JP Morgan said on Sunday, 16 March 2008, it
would buy Bear Stearns in an all-stock deal, and that the Fed would fund up
to $30 billion of Bear Stearns' less liquid assets.
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In a major development, the US Federal Reserve on Sunday, 16 March 2008,

cut its discount rate to 3.25% from 3.5% and said that it was creating a
facility to let primary dealers borrow at that rate.
A torrent of bad news has spooked bourses in the past few days with buyers
deserting the market. Adding to the woes of domestic bourses already hit by
tumbling global markets were earnings downgrade recently by brokerages of
ICICI Bank, Indias biggest private sector bank in terms of net profit, and
Larsen & Toubro, Indias biggest engineering and construction firm in terms
of order book; lower-than-expected industrial production data for January
2008; and a surge in inflation.
The hike in short-term capital gains tax and alteration of tax treatment of the
Securities Transaction Tax (STT) in Union Budget 2008-09 announced on
29 February 2008 has earlier dented sentiment. Buyers have stayed away
from the bourses on continued uncertainty about the extent and duration of
the credit crisis caused by the defaults in the US sub-prime mortgage market.
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Companies in the Sensex
List of BSE Sensex companies provides the full list of companies that have
been part of the BSE Sensex since its inception in 1986 (base lined to 1979).
(As of October 31, 2007)
Code Name Sector

500410 ACC Housing Related
500425 Ambuja Cements Ltd Housing Related
500490 Bajaj Auto Transport Equipments
500103 BHEL Capital Goods
532454 Bharti Airtel Telecom
500087 Cipla Healthcare
500124 DLF Ltd** Construction
532868 Grasim Industries Diversified
500010 HDFC Finance
500180 HDFC Bank Finance
500440 Hindalco Industries Metal, Metal Products & Mining
500696 Hindustan Lever Limited FMCG
532174 ICICI Bank Finance
500209 Infosys Information Technology
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500875 ITC Limited FMCG

500510 Larsen & Toubro Capital Goods & Construction.
500520 Mahindra & Mahindra Limited Transport Equipments
532500 Maruti Udyog Transport Equipments
532555 NTPC Power
500312 ONGC Oil & Gas
500359 Ranbaxy Laboratories Healthcare
532712 Reliance Communications Telecom
500390 Reliance Energy Power
500325 Reliance Industries Oil & Gas
500376 Satyam Computer Services Information Technology
500112 State Bank of India Banking & Finance
532540 Tata Consultancy Services Information Technology
500570 Tata Motors Transport Equipments
500470 Tata Steel Metal, Metal Products & Mining
507685 Wipro Information Technology
**DLF replaced Dr. Reddy's Lab on 19th November, 2007.
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1b. STATEMENT OF THE PROBLEM
There has been volatility in the Indian stock market. The statement of
problem is to identify if there is relationship between FII flows and Sensex.
1c. NEED AND IMPORTANCE OF THE STUDY
Since the last decade, India has gradually emerged as an important

destination of global investors’ investment in emerging markets. But the
highly fluctuating nature of such flows has been a matter of concern for
economies receiving these investments. The large and sudden reversals of
foreign equity investments make them extremely volatile in character—a
phenomenon which has the potential to destabilize the domestic economy of
the recipient country, even if it is otherwise sound. Hence, the analysis of
volatility of such flows is very important from the viewpoint of the policy
makers of a country like India where international investment in securities is
increasingly assuming importance as external finance.
1d. RESEARCH OBJECTIVES
• To find relationship between net FII flow and sensex.
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2a. Purpose of Literature Review
The literature review section examines recent research studies, company

data, or industry reports that act as a bass for the proposed study. Related
literature and secondary data gives comprehensive perspective. Earlier
references will be helpful if the problem has a historical background.
Always the literature survey reference should be to the original source. The
literature applies to the study you are proposing. The literature review may
also explain the need for the proposed work to appraise the shortcomings
and informational gaps in secondary data sources.
2b. Methodology followed by author
Very few studies have been carried out in India empirically to see the impact
of FIIs investments on Indian stock market. According to Dornbusch and
Park (1995), foreign investors pursue positive feedback strategies, which
make stocks to overreact to change in fundamentals.
Early studies by Samal (1997) and Pal (1998) found co movement between
FIIs flows and Bombay Stock Exchange (BSE) index to be high.
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Chalapati Rao(1999) analyzed the investment exposure of five US-based

India specific funds, which suggested a close resemblance between FIIs
investment profile and trading pattern at the BSE.
Batra (2003), using both daily and monthly data attempted to understand the
trading behavior of FIIs and returns in Indian equity market. He found the
strong evidence of FIIs chasing trends and adopting positive feedback and
herding trading strategies. However, Batra did not find FIIs having any
destabilizing impact on the equity market.
Chakrabarti (2002), made an empirical investigation to see the

interrelationship between FIIs flows and equity returns in India using
monthly data. He came with the evidence that the FIIs flows are highly
correlated with equity returns in India. He also found that FIIs flows are
more likely to be the effect than the cause of these returns, which
contradicted the view that the FIIs determine market returns in general.
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RESEARCH METHODOLOGY:
3a. TYPE OF RESEARCH: The study type is analytical,

quantitative and historical. Analytical because facts and existing
information is used for the analysis, Quantitative as relationship is
examined by expressing variables in measurable terms and also
Historical as the historical information is used for analysis and
interpretation.
3b. DATA COLLECTION AREA: The data required for

understanding are collected from the websites like
www.BSEIndia.com, www.moneycontrol.com, www.sebi.gov.in etc.
3c. SAMPLE SIZE: FII’s flow and sensex data from January 2000
to December 2006 for regression analysis. FII flow and sensex data
from January 2007 to March 2008 for hypothesis testing were
analyzed.
3d. DATA COLLECTION TOOLS: To find the relationship

between FII flows and Sensex, Regression analysis is done.
Regression analysis is done for FII’s flow and sensex data also from
January 2000 to December 2006. T-test is used for testing the
hypothesis for the period January 2007 to March 20008.
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3e. RESEARCH LIMITATIONS:

Analysis is done using excel instead of manual calculations.
TOOLS USED FOR TESTING OF HYPOTHESIS
A. REGRESSION ANALYSIS
Regression analysis is a technique used for the modeling and analysis

of numerical data consisting of values of a dependent variable (response
variable) and of one or more independent variables (explanatory variables).
The dependent variable in the regression equation is modeled as a function
of the independent variables, corresponding parameters ("constants"), and an
error term. The error term is treated as a random variable. It represents
unexplained variation in the dependent variable. The parameters are
estimated so as to give a "best fit" of the data. Most commonly the best fit is
evaluated by using the least squares method, but other criteria have also been
used.
Data modeling can be used without there being any knowledge about the
underlying processes that have generated the data; in this case the model is
an empirical model. Moreover, in modeling knowledge of the probability
distribution of the errors is not required. Regression analysis requires
assumptions to be made regarding probability distribution of the errors.
Statistical tests are made on the basis of these assumptions. In regression
analysis the term "model" embraces both the function used to model the data
and the assumptions concerning probability distributions.
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Underlying assumptions
• The sample must be representative of the population for the inference

prediction.
• The dependent variable is subject to error. This error is assumed to be
a random variable, with a mean of zero. Systematic error may be
present but its treatment is outside the scope of regression analysis.
• The independent variable is error-free. If this is not so, modeling
should be done using Errors-in-variables model techniques.
• The predictors must be linearly independent, i.e. it must not be
possible to express any predictor as a linear combination of the others.
• The errors are uncorrelated, that is, the variance-covariance matrix of
the errors is diagonal and each non-zero element is the variance of the
error.
• The variance of the error is constant. If not, weights should be used.
• The errors follow a normal distribution. If not, the generalized linear
model should be used.
REGRESSION EQUATION
Y = MX + C
Where, Y = ESTIMATED SENSEX CHANGE

M = INTERCEPT
X = ACTUAL FII FLOWS
C = SLOPE
________________________________________________________________________

________________________________________________________________________
2. T - TEST
t-Test: Two-Sample Assuming Unequal Variances
This equation is only used when it can be assumed that the two distributions
have the unequal variance. The unpaired t test should not be used if there is a
significant difference between the variances of the two samples; StatsDirect
tests for this and gives appropriate warnings. For the situation of unequal
variances, StatsDirect calculates Satterthwaite's approximate t test; a method
in the Behrens-Welch family.
Assuming unequal variances, the test statistic is calculated as:
________________________________________________________________________

________________________________________________________________________
where x bar 1 and x bar 2 are the sample means, s² is the sample variance, n1
and n2 are the sample sizes, d is the Behrens-Welch test statistic evaluated
as a Student t quantile with df freedom using Satterthwaite's approximation.
Null hypothesis is accepted if the T test value is less than t-statistic value
otherwise null hypothesis is rejected
Assumption:
1. The samples (n1 and n2) from two normal populations are independent
2. One or both sample sizes are less than 30
3. The appropriate sampling distribution of the test statistic is the t
distribution
4. The unknown variances of the two populations are not equal
________________________________________________________________________

________________________________________________________________________
t- Test
This test is done for comparing following two variables:
• Actual Value of change in sensex from January 2007 to March 2008.
• Estimated Value of change in sensex from January 2007 to March

2008.
________________________________________________________________________

________________________________________________________________________
CHAPTER 4
PRESENTATION AND
ANALYSIS OF DATA
________________________________________________________________________

________________________________________________________________________
Hypothesis:
H0: There is no difference between actual and expected

change in sensex values.
H1: There is no difference between actual and expected

change in sensex values.
Table 1: Regression Statistics
Regression Statistics
Multiple R 0.650705037
R Square 0.423417045
Adjusted R Square 0.416385546
Standard Error 324.5991576
Observations 84
Interpretation
Correlation between net FII inflows and sensex is 65.07%. It means that FII
inflows and sensex are correlated. R square statistics shows that the effect is
to the extent of 42.34%
________________________________________________________________________

________________________________________________________________________
Standard
Coefficients Error t Stat P-value
Intercept -99.24208432 42.5265311 -2.33365 0.022063
X Variable 1 0.090775323 0.011697892 7.759973 2.08E-11
Intercept -99.2421
X Variable 1 0.090775
Table 2: Calculation of Estimated values of Sensex Change (Y`)
Actual Sensex FII Estimated (Y`)Difference

(Estimated-
Change X Y`= mX + C Actual)
-1,583.12 124.4 -87.94969 1,495.17
-241.95 5,419.90 392.7493225 634.70
-2,744.39 -17,226.90 -1663.013948 1,081.38
739.90 4,896.70 345.2558425 -394.64
-767.04 -4,597.40 -516.571085 250.47
2,481.00 15,577.60 1314.81454 -1,166.19
1,889.11 18,948.50 1620.807988 -268.30
-25.42 -7,526.80 -782.48737 -757.07
865.83 18,132.80 1546.76282 680.93
40.23 7,939.60 621.47509 581.25
556.69 4,574.50 316.0081375 -240.68
1,060.44 5,431.80 393.829545 -666.61
58.36 1,403.30 28.1424575 -30.22
-1,186.27 6,065.00 451.308275 1,637.58
263.15 94.45 -90.66840125 -353.82
________________________________________________________________________

________________________________________________________________________
Table 3: T - test
t-Test: Two-Sample Assuming Unequal

Variances
Variable Variable
1 2
Mean 93.768 259.3642
Variance 1749339 751357.6
Observations 15 15
Hypothesized Mean Difference 0
Df 24
t Stat -0.40557
P(T<=t) one-tail 0.344326
t Critical one-tail 1.710882
P(T<=t) two-tail 0.688652
t Critical two-tail 2.063899
Interpretation:
Since the value of t Stat is less than t critical value,
Null Hypothesis i.e. H0: There is no difference between

actual and expected change in sensex values is accepted
Hence Net FII Flows and Sensex are correlated.
________________________________________________________________________

________________________________________________________________________
CHAPTER 5
CONCLUSION
________________________________________________________________________

________________________________________________________________________
CONCLUSION
The present study examines the relationship between Net FII investments
and sensex. During the past eight years there have been several ups and
downs in the Indian stock market and foreign portfolio investment patterns.
By using monthly data from January 2000 to March 2008, I tried to capture
the relationship between FII and Sensex. FIIs are more attracted for
investing' (they buy heavily). The reverse happens (FIIs sell heavily) when
market capitalization is low. When FII s are net buyers, prices and trading
volume both go up thereby increasing the market capitalization. On the other
hand heavy selling by FIIs brings down the market capitalization by reduced
trading volume and/or share prices. However, it is found that the current
month's FII investment pattern has a significant impact on the current
month's BSE (Sensex) market capitalization.
The major conclusion after data analysis is that the FII flows are correlated
with sensex. Correlation between net FII inflows and change in sensex is
65.07%. It means that FII inflows and sensex are highly correlated. R square
statistics shows that the value of sensex is dependent on FII to the extent of
42.34%. For remaining 58% sensex is dependent on other factors like
inflation, exchange rates, etc.
________________________________________________________________________

________________________________________________________________________
BIBLOGRAPHY
________________________________________________________________________

________________________________________________________________________
BIBLOGRAPHY
BOOKS:
1. FUNDAMENTAL OF STATISTICS – S.C. GUPTA

Sixth revised & enlarged edition, 2006 [Pages 9.1 to 9.46]
2. BUSINESS RESEARCH METHODS – DONALD R COOPER

Ninth edition [Pages 463 to 530]
ICFAI journal of Applied Finance Articles:
a) FII Inflows to India: Their Effect on Stock Market Volatility

- Manisha Joshi and Chiranjit Mukhopadhyay
b) Causal Relationship between FII and Indian Stock Market

- SubarnaDey and Bishnupriya Mishra
c) Key determinants of stock prices in India.

-Subir Sen and Rajkumar Ray
d) Security analysis and portfolio management (Module I to X)

- IGNOU
Websites:
WWW.BSEINDIA.COM
WWW.MONEYCONTROL.COM
WWW.INVESTOPEDIA.COM
WWW.WIKIPEDIA.COM
WWW.SEBI.GOV.IN
________________________________________________________________________

________________________________________________________________________
ANNEXTURE
________________________________________________________________________

________________________________________________________________________
Monthly Sensex Data

(2000-2008)
Months Open Close Change

Mar-08 17,227.56 15,644.44 -1,583.12
Feb-08 17,820.67 17,578.72 -241.95
Jan-08 20,393.10 17,648.71 -2,744.39
Dec-07 19,547.09 20,286.99 739.90
Nov-07 20,130.23 19,363.19 -767.04
Oct-07 17,356.99 19,837.99 2,481.00
Sep-07 15,401.99 17,291.10 1,889.11
Aug-07 15,344.02 15,318.60 -25.42
Jul-07 14,685.16 15,550.99 865.83
Jun-07 14,610.28 14,650.51 40.23
May-07 13,987.77 14,544.46 556.69
Apr-07 12,811.93 13,872.37 1,060.44
Mar-07 13,013.74 13,072.10 58.36
Feb-07 14,124.36 12,938.09 -1,186.27
Jan-07 13,827.77 14,090.92 263.15
________________________________________________________________________

________________________________________________________________________
Month Opening Closing Change
Dec-06 13,729.67 13,786.91 57.24

Nov-06 12,992.62 13,696.31 703.69
Oct-06 12,473.79 12,961.90 488.11
Sep-06 11,699.57 12,454.42 754.85
Aug-06 10,737.50 11,699.05 961.55
Jul-06 10,646.56 10,743.88 97.32
Jun-06 10,472.46 10,609.25 136.79
May-06 12,103.78 10,398.61 -1,705.17
Apr-06 11,342.96 11,851.93 508.97
Mar-06 10,368.75 11,279.96 911.21
Feb-06 9,959.24 10,370.24 411.00
Jan-06 9,422.49 9,919.89 497.40
Dec-05 8,813.82 9,397.93 584.11
Nov-05 7,989.86 8,788.81 798.95
Oct-05 8,662.99 7,892.32 -770.67
Sep-05 7,818.90 8,634.48 815.58
Aug-05 7,632.01 7,805.43 173.42
Jul-05 7,165.45 7,635.42 469.97
Jun-05 6,729.39 7,193.85 464.46
May-05 6,183.07 6,715.11 532.04
Apr-05 6,506.60 6,154.44 -352.16
Mar-05 6,725.92 6,492.82 -233.10
Feb-05 6,565.21 6,713.86 148.65
Jan-05 6,626.49 6,555.94 -70.55
Dec-04 6,259.28 6,602.69 343.41
Nov-04 5,678.65 6,234.29 555.64
Oct-04 5,587.46 5,672.27 84.81
Sep-04 5,202.16 5,583.61 381.45
Aug-04 5,193.25 5,192.08 -1.17
Jul-04 4,813.76 5,170.32 356.56
Jun-04 4,792.01 4,795.46 3.45
May-04 5,645.86 4,759.62 -886.24
________________________________________________________________________

________________________________________________________________________
Apr-04 5,599.12 5,655.09 55.97

Mar-04 5,649.30 5,590.60 -58.70
Feb-04 5,715.46 5,667.51 -47.95
Jan-04 5,944.23 5,695.67 -248.56
Dec-03 5,086.86 5,838.96 752.10
Nov-03 4,946.93 5,044.82 97.89
Oct-03 4,452.07 4,906.87 454.80
Sep-03 4,248.07 4,453.24 205.17
Aug-03 3,800.73 4,244.73 444.00
Jul-03 3,617.74 3,792.61 174.87
Jun-03 3,176.56 3,607.13 430.57
May-03 2,949.04 3,180.75 231.71
Apr-03 3,037.54 2,959.79 -77.75
Mar-03 3,301.67 3,048.72 -252.95
Feb-03 3,265.08 3,283.66 18.58
Jan-03 3,399.72 3,250.38 -149.34
Dec-02 3,247.60 3,377.28 129.68
Nov-02 2,956.94 3,228.82 271.88
Oct-02 2,976.04 2,949.32 -26.72
Sep-02 3,206.81 2,991.36 -215.45
Aug-02 2,998.46 3,181.23 182.77
Jul-02 3,246.44 2,987.65 -258.79
Jun-02 3,162.27 3,244.70 82.43
May-02 3,361.33 3,125.73 -235.60
Apr-02 3,482.94 3,338.16 -144.78
Mar-02 3,551.56 3,469.35 -82.21
Feb-02 3,336.17 3,562.31 226.14
Jan-02 3,243.84 3,311.03 67.19
Dec-01 3,301.05 3,262.33 -38.72
Nov-01 3,003.95 3,287.56 283.61
Oct-01 2,817.74 2,989.35 171.61
Sep-01 3,245.71 2,811.60 -434.11
Aug-01 3,335.00 3,244.95 -90.05
Jul-01 3,459.15 3,329.28 -129.87
Jun-01 3,637.03 3,456.78 -180.25
May-01 3,565.53 3,631.91 66.38
Apr-01 3,491.41 3,519.16 27.75
Mar-01 4,288.23 3,604.38 -683.85
________________________________________________________________________

________________________________________________________________________
Feb-01 4,303.13 4,247.04 -56.09

Jan-01 3,953.22 4,326.72 373.50
Dec-00 3,968.89 3,972.12 3.23
Nov-00 3,749.35 3,997.99 248.64
Oct-00 4,035.64 3,711.02 -324.62
Sep-00 4,571.89 4,090.38 -481.51
Aug-00 4,295.35 4,477.31 181.96
Jul-00 4,846.69 4,279.86 -566.83
Jun-00 4,406.52 4,748.77 342.25
May-00 4,736.02 4,433.61 -302.41
Apr-00 5,070.50 4,657.55 -412.95
Mar-00 5,464.65 5,001.28 -463.37
Feb-00 5,217.65 5,447.47 229.82
Jan-00 5,209.54 5,205.29 -4.25
________________________________________________________________________

________________________________________________________________________
FII Flows
Month Equity (Rs. Crore)

Gross Gross Net
Purchase
Purchase Sales /Sales
Mar-08 70,322.70 70,198.30 124.4

Feb-08 76,437.10 71,017.20 5,419.90
Jan-08 105,960.80 123,187.70 -17,226.90
Dec-07 80,988.10 76,091.40 4,896.70

Nov-07 89,510.00 94,107.40 -4,597.40
Oct-07 124,882.30 109,304.70 15,577.60
Sep-07 70,694.60 51,746.10 18,948.50
Aug-07 58,223.20 65,750.00 -7,526.80
Jul-07 80,216.20 62,083.40 18,132.80
Jun-07 54,748.50 46,808.90 7,939.60
May-07 51,574.90 47,000.40 4,574.50
Apr-07 44,701.50 39,269.70 5,431.80
Mar-07 50,552.60 49,149.30 1,403.30
Feb-07 51,568.90 45,503.90 6,065.00
Jan-07 47,506.77 47,412.32 94.45
70,940.05
Dec-06 37,419.50 40,830.40 -3,410.90

Nov-06 31,146.96 24,572.22 6,574.74
Oct-06 27,591.94 23,013.30 4,578.54
________________________________________________________________________

________________________________________________________________________
Sep-06 33,014.20 26,782.50 6,231.70

Aug-06 28,104.60 23,330.60 4,774.00
Jul-06 24,983.10 23,535.20 1,447.90
Jun-06 39,845.60 38,427.40 1,418.20
May-06 49,338.20 57,585.50 -8,247.20
Apr-06 40,415.60 39,826.40 589.2
Mar-06 53,578.70 47,046.40 6,532.30
Feb-06 35,603.10 28,031.20 7,571.90
Jan-06 34,762.80 31,542.10 3,220.70
Dec-05 31,563.40 22,098.20 9,465.20

Nov-05 23,739.10 19,290.50 4,448.60
Oct-05 25,817.50 29,623.10 -3,805.60
Sep-05 24,160.70 20,056.10 4,122.60
Aug-05 26,455.10 22,042.50 4,412.60
Jul-05 25,589.30 17,377.10 8,212.20
Jun-05 27,693.10 21,931.00 5,762.10
May-05 15,522.60 16,330.20 -807.6
Apr-05 15,261.70 16,308.80 -1,047.10
Mar-05 26,701.20 19,051.90 7,649.30
Feb-05 20,898.00 13,203.00 7,695.00
Jan-05 14,784.40 15,066.10 -281.7
Dec-04 19,009.90 13,203.20 5,806.70

Nov-04 18,219.10 11,796.70 6,412.40
Oct-04 16,560.20 12,517.80 4,042.40
Sep-04 12,974.10 10,189.80 2,784.30
Aug-04 12,471.00 9,659.80 2,811.20
Jul-04 10,967.30 9,784.00 1,183.30
Jun-04 10,525.20 10,214.60 310.6
May-04 15,726.10 18,976.60 -3,250.50
Apr-04 16,304.60 12,131.60 4,173.00
Mar-04 20,383.50 11,614.60 8,769.00
Feb-04 14,378.10 11,106.30 3,271.90
Jan-04 16,364.60 13,990.50 2,374.10
Dec-03 14,038.10 7,788.20 5,411.00
________________________________________________________________________

________________________________________________________________________
Nov-03 9,759.10 6,563.80 3,195.30

Oct-03 14,475.20 7,612.60 6,862.60
Sep-03 11,500.90 7,564.80 3,936.10
Aug-03 7,654.20 5,627.60 2,026.60
Jul-03 8,472.50 6,044.30 2,428.20
Jun-03 6,489.20 3,877.50 2,611.70
May-03 5,461.00 4,252.60 1,208.40
Apr-03 5,196.20 4,646.30 549.9
Mar-03 3,151.00 2,898.40 252.7
Feb-03 3,275.90 2,870.40 405.2
Jan-03 5,343.20 4,277.60 1,065.50
Dec-02 4,013.00 3,572.70 440.3

Nov-02 3,840.60 3,371.20 469.4
Oct-02 2,929.00 3,528.60 -599.6
Sep-02 3,722.70 3,354.50 368.2
Aug-02 2,629.20 2,408.00 221.2
Jul-02 3,380.30 3,024.20 356.1
Jun-02 3,279.00 3,451.00 -172
May-02 3,786.91 3,958.44 -171.54
Apr-02 4,358.10 4,459.60 -101.51
Mar-02 3,872.10 3,398.60 454.07
Feb-02 5,453.80 3,448.30 2,005.46
Jan-02 5,055.60 4,698.40 357.15
Dec-01 3,459.20 3,143.50 315.7

Nov-01 3,509.00 3,358.40 150.6
Oct-01 3,608.80 2,893.10 715.7
Sep-01 2,936.80 3,352.40 -415.6
Aug-01 3,020.20 2,582.80 437.4
Jul-01 3,069.50 2,347.10 722.5
Jun-01 3,462.80 2,747.50 715.3
May-01 3,734.10 2,688.60 1,045.60
Apr-01 4,599.00 2,829.20 1,770.00
Mar-01 6,577.60 4,604.50 1,972.90
Feb-01 6,057.90 4,239.00 1,819.10
________________________________________________________________________

________________________________________________________________________
Jan-01 7,831.70 3,786.70 4,045.50
Dec-00 4,300.60 4,877.40 -576.9

Nov-00 4,428.10 3,496.00 932.8
Oct-00 4,219.20 4,491.00 -271.7
Sep-00 6,978.60 6,836.20 142.5
Aug-00 5,134.20 3,788.00 1,346.00
Jul-00 5,689.50 7,107.30 -1,418.00
Jun-00 5,243.90 6,203.20 -959.3
May-00 5,985.90 5,501.80 484.2
Apr-00 8,034.90 5,344.30 2,690.50
Mar-00 9,516.30 8,451.80 1,064.40
Feb-00 9,265.50 6,481.00 2,784.80
Jan-00 5,994.80 5,843.60 151.2
________________________________________________________________________

Relation Between FII Flows &amp; BSE Stocks

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RELATIONSHIP BETWEEN FII FLOWS AND SENSEX

RELATIONSHIP BETWEEN FII FLOWS AND

Submitted in partial fulfillment of the requirement for

Under the guidance of

M.P.Birla Institute of Management

M P BIRLA INSTITUTE OF MANAGEMENT 1

I hereby declare that the report titled “RELATIONSHIP

Place: Bangalore Deepa Kundnani

M P BIRLA INSTITUTE OF MANAGEMENT 2

This is to certify that Miss Deepa Kundnani, bearing Registration

Place: Bangalore Dr.Nagesh.S.Mallavalli

M P BIRLA INSTITUTE OF MANAGEMENT 3

I hereby declare that the research work done in this dissertation

Place: Bangalore Prof. Dr.Nagesh.S.Mallavalli

M P BIRLA INSTITUTE OF MANAGEMENT 4

The successful accomplishment of any task is incomplete without

My special thanks to my project guide Prof Dr. N. MALAVALLI

Last, but not the least, I would like to thank my teachers, my

M P BIRLA INSTITUTE OF MANAGEMENT 5

This report investigates the relationship between net foreign institutional

M P BIRLA INSTITUTE OF MANAGEMENT 6

M P BIRLA INSTITUTE OF MANAGEMENT 7

M P BIRLA INSTITUTE OF MANAGEMENT 8

M P BIRLA INSTITUTE OF MANAGEMENT 9

1a. BACKGROUND OF THE STUDY

Foreign Institutional Investor (FII) is an investor - mostly of the form of

The number of foreign institutional investors (FIIs) registered with the

M P BIRLA INSTITUTE OF MANAGEMENT 10

Some investment highlights:

M P BIRLA INSTITUTE OF MANAGEMENT 11

To further increase FII participation in the Indian market, the Government

M P BIRLA INSTITUTE OF MANAGEMENT 12

COUNTRY-WISE BREAKUP OF FII IN INDIA

Country-wise FII Breakup (Dec- 2007)

M P BIRLA INSTITUTE OF MANAGEMENT 13

M P BIRLA INSTITUTE OF MANAGEMENT 14

M P BIRLA INSTITUTE OF MANAGEMENT 15

BOMBAY STOCK EXCHANGE SENSITIVE INDEX

The Bombay Stock Exchange

M P BIRLA INSTITUTE OF MANAGEMENT 16

The BSE Sensex or Bombay Stock Exchange Sensitive Index or BSE 30

M P BIRLA INSTITUTE OF MANAGEMENT 17

• 8000, September 8, 2005 - On September 8, 2005, the Bombay Stock

M P BIRLA INSTITUTE OF MANAGEMENT 18

• 9000, December 09, 2005 - The Sensex on November 28, 2005

• 10,000, February 7, 2006 - The Sensex on February 6, 2006 touched

M P BIRLA INSTITUTE OF MANAGEMENT 19

• 14,000, December 5, 2006 - The Sensex on December 5, 2006

• 15,000, July 6, 2007- The Sensex on July 6, 2007 crossed another

• 16,000, September 19, 2007- The Sensex on September 19, 2007

• 17,000, September 26, 2007- The Sensex on September 26, 2007

M P BIRLA INSTITUTE OF MANAGEMENT 20

• 21,000, January 8, 2008 - The Sensex opened with a huge positive

M P BIRLA INSTITUTE OF MANAGEMENT 21

• 15,000, March 13, 2008 - Major setback was witnessed on the

Major crashes since 2000

M P BIRLA INSTITUTE OF MANAGEMENT 22

Effects of the sub prime crisis in the US

Participatory notes issue

On October 16, 2007, SEBI (Securities & Exchange Board of India)

M P BIRLA INSTITUTE OF MANAGEMENT 23

Finance Minister P. Chidambaram issued clarifications, in the meantime,

After detailed clarifications from the SEBI chief M. Damodaran regarding

M P BIRLA INSTITUTE OF MANAGEMENT 24

Relation Between FII Flows & BSE Stocks

Relation Between FII Flows & BSE Stocks