STUDY ON IMPACT OF FOREIGN INSTITUTIONAL INVESTORS ON

EXCHANGE RATE & VALUE OF INDIAN RUPEES

INTRODUCTION OF TOPIC
In this project we will try to understand the concept of the Foreign Institu
tionalInvestment (FII) and their role and effect on the exchange rate of Indian Rup
ee means thefluctuation in FII investment affects the value of exchange rate or not.
In order to understand the role and effect of the FII on Indian Rupee we n
eed toknow in brief about the Foreign Institutional Investment and Excha
nge Rate of Indian National Rupee.

FII (FOREIGN INSTITUTIONAL INVESTORS)

Foreign institutional investor means an entity established or incorporated outsideIn
dia for the purpose of making investments into the Indian securities mark
et under theregulations prescribed by SEBI. Positive tidings about the In
dian economy combinedw i t h a f a s t g r o w i n g m a r k e t h a v e m a d e I n
d i a a n a t t r a c t i v e d e s t i n a t i o n f o r f o r e i g n institutional investors.

‘ F I I ’ i n c l u d e “O v e r s e a s p e n s i o n f u n d s , mu t u a l f u n d s , i n v e s t me n t t
r u s t , a s s e t ma n a g e me n t c o mp a n y , n o mi n e e c o mp a n y , b a n k , i n s t i t u t
i o n a l p o r t f o l i o ma n a g e r , u n i v e r s i t y f u n d s , e n d o w me n t s , f o u n d a t i o n
s , c h a r i t a b l e t r u s t s , c h a r i t a b l e s o c i e t i e s , a trustee or power of attorney h
older incorporated or established outside India proposing tomake proprietary inv
estments or investments on behalf of a broadbased fund. FIIs caninvest th
eir own funds as well as invest on behalf of their overseas clients register
ed assuch with SEBI. These client accounts that the FII manages are known as ‘su
baccounts’.A domestic portfolio manager can also register itself as an FII t
o manage the funds of sub-accounts.

Foreign Institutional Investors (FIIs) are entities established or i

n c o r p o r a t e d outside India and make proposals for investments in India.
These investment proposals by the FIIs are made on behalf of sub accoun
ts, which may include foreign corporate,individuals, and funds etc. In ord
er to act as a banker to the FIIs, the RBI has designated banks that are autho
rized to deal with them. The biggest source through which FIIs investi s t h e i s s u
a n c e o f p a r t i c i p a t o r y No t e s ( P No te s ) , wh i c h a r e a l s o k n o wn a s o f f
s h o r e Derivatives.

F o r e i g n I n v e s t me n t r e f e r s t o i n v e s t me n t s ma d e b y r e s i d e n t s o f a c
o u n t r y i n financial assets and production process of another country. Aft
er the opening up of theborders for capital movement these investments h
ave grown in leaps and bound.But ith a d v a r i e d e f f e c t s a c r o s s t h e c o u
ntries. It can affect the factor productivity of therecipient countr
y a n d c a n a l s o a f f e c t t h e b a l a n c e o f p a yme n t s [ B OP ] . I n d e v e l o p i n
g countries there was a great need of foreign capital, not only to increase their prod
uctivityof labour, but also helps to build the foreign exchange reserves to
meet the trade deficit.Foreign investment provides a channel through which thes
e countries can have access toforeign capital. It can come in two forms: Fore
ign Direct Investment (FDI) and ForeignPortfolio Investment (FPI).

Foreign Direct Investment [FDI] involves in the direct production activit

y anda l s o o f me d i u m t o l o n g t e r m n a t u r e . B u t t h e F o r e i g n P o r t f o l i o
I n v e s t me n t [ F P I ] i s a s h o r t t e r m i n v e s t m e n t m o s t l y i n t h e f i n a n
c i a l m a r k e t s a n d i t c o n s i s t s o f F o r e i g n I n s t i t u t i o n a l I n v e s t me n
t ( F I I ) . Th e F I I , g i v e n i t s s h o r t t e r m n a t u r e , mi g h t h a v e
48 billions out of which US$ 23 billionsi s i n t h e f o r m o f F P I . F I I c o n s
ists of around US$ 12 billions in the total foreigninvestmen
ts. This shows the importance of FII in the overall foreign
i n v e s t m e n t programme. As India is in the process of liberalizing the b i
directional causation with the returns of other domestic financial markets
like moneym a r k e t , s t o c k m a r k e t , f o r e i g n e x c h a n g e m a r k e
t e t c . H e n c e , u n d e r s t a n d i n g t h e determinants of FII is very impo
rtant for any emerging economy as itwould have larger impact on the dome
stic financial markets in the short run and real impact in the long run.The present st
udy examines the determinants of foreign portfolio investment in the Indianc o n t e
xt as the country after experiencing the foreign exchange crisis o
p e n e d u p t h e economy for foreign capital.

India, being a capital scarce country, has taken lot of measures to attract
foreigninvestment since the beginning of reforms in 1991. Till the end of January
2003 it couldattract a total foreign investment of around US$ capital account, it
would havesignificant impact on the foreign investment and particularly
on the FII, as this wouldaffect shortterm stability in the financial markets. Henc
e, there is a need to determine the push and pull factors behind any change in
the FII, so that we can frame our policies toinfluence the variables whic
h drivein foreign investment. Also FII has been subject of intense discuss
ion, as it is held responsible for intensifying currency crisis in 1990’selse
where.

The present study would examine the determinants of FII in Indian context. Herew
e make an attempt to analyze the effect of return, risk and inflation, which are trace
d to be major determinants in the literature on FII. The proposed relation (discusse
d in detaillater) is that inflation and risk in domestic country and return in
foreign country woulda d v e r s e l y a f f e c t t h e F I I f l o w i n g t o d o me s t i c c
o u n t r y, wh e r e a s i n f l a t i o n a n d r i s k i n foreign country and return in domes
tic country would have favorable affect on the same.In the next section we would
briefly discuss the existing studies. In section 3, we discussthe theoretical model. S
ection 4 briefly discusses the trends in FII in India. Database andmethodology adop
ted in this study are discussed in Section 5. In section 6, we discuss theestimated re
sults and conclusions are drawn accordingly in the last section.

Foreign Institutional Investment in India

India opened its stock market to foreign investors in September 1992 and has,
since 1993, received portfolio Investment from foreigners in the form of foreign
institutional investment in equities. This has become one of the main channels of
Fll in India for foreigners. In order to trade in Indian equity market foreign
corporations need to register with SEBI as Foreign Institutional Investor (FII).
India allows only authorized foreign investors who are referred to as FII's which
include pension funds, investment trust, asset management companies, university
funds, endowments, foundation. charitable interests and charitable societies that
have a track record of five years and which are registered with a statutory authority
in their own country of incorporation or settlement. It is possible for foreigners to
trade in Indian securities without registering as an FII but such cases require
approval from the RBI or the Foreign Investment Promotion Board. FlI`s generally
concentrate in secondary market. The total amount of foreign institutional
investment in India has accumulated to formidable sum of over US $171.81 billion
by the end of FY 2018.

Entry option for FII’S

A foreign company planning to set up business operations in India has th
e followingoptions:

1.Incorporated Entity

By incorporating a company under the Companies Act, 1956 through

 Joint companies or
 Wholly owned subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on

therequirements of the investor, subject to equity caps in respect of the a
rea of activitiesunder the Foreign Direct Investment (FDI) policy.

2. Important terms to know about FIIs:

Sub-account:

Subaccount includes those foreign corporations, foreign individuals, andi

nstitutions,funds or portfolios established or incorporated outside India on whose
behalf investmentsare proposed to be made in India by a FII.

Designated Bank:

Designated Bank means any bank in India which has been authorized by t
he ReserveBank of India to act as a banker to FII.

Domestic Custodian:

Domestic Custodian means any entity registered with SEBI to carry on th

e activity of providing custodial services in respect of securities.

Broad Based Fund:

Broad Based Fund means a fund established or incorporated outside India
, which has atleast twenty investors with no single individual investor holding m
ore than 10% shares or units of the fund. Provided that if the fund has instit
utional investor(s) it shall not benecessary for the fund to have twenty investor
s.If the fund has an institutional investor holding more than 10% of share
s or units in thefund, then the institutional investor must itself be broad based fun
d.

3. Unincorporated entity

As a foreign company through Liaison office/Representative office

Project office, branch office

FOREIGN INSTITUTIONAL INVESTORS REGISTRATION

Following entities / funds are eligible to get registered as FII:

 Pension funds
 Mutual funds
 Investment trust
 Insurance or reinsurance companies
 Banks
 Endowments
 University funds
 Foundations
 Charitable trusts or charitable societies

Further, following entities proposing to invest on behalf of broad based f

unds, are alsoeligible to be registered as FIIs:

 Asset management companies

 Institutional portfolio managers
 Trustees
 Power of attorney holders
 OBJECTIVES OF THE STUDY
1. To analyze the impact of the investment made by FIIs on exchange rate of
Indian rupee.
2. To study the scope and trading mechanism of Foreign Institutional investors
in India.
3. Impact can be seen in term of volatility of the exchange rate.
4. To find the relationship between the FII`s equity investment pattern and
Exchange rates.
5. Volatility of the exchange rate denotes to the ups & down in the exchange
rate due to fluctuation of the FII`s.
 RESEARCH METHODOLOGY
PROBLEM DEFINITION

To analyze the impact of investment made by Foreign Institutional Investors (FII)o

n the Exchange rate of Indian Rupee. FII make investment India what is i
ts effect onExchange Rate it can be increase or decrease.

RESEARCH DESIGN

Research Design is the plan structure and strategy of investigation concei

ved soas to obtain answers to research problems. It is specification of me
thods and proceduresfor acquiring the information needed.In this project Caus
al Research Design has been used to analyze the cause andeffect relationshi
p between the variables.C a u s a l r e s e a r c h d e s i g n i s a p p l i e d t o f i n d
o u t t h e i m p a c t o f i n d e p e n d e n t v a r i a b l e i n v e s t me n t ma d e b y F I I
o n v a r i o u s d e p e n d e n t v a r i a b l e s r e l a t e d t o Ex c h a n g e r a t e o f Indian ru
pee.These dependent variables include:

1. Closing values of Exchange rate

2. Volatility i.e., Standard Deviation

SAMPLING DESIGN

Universe

In this study the universe is finite and will take into the consideration related news
and events that have happened in last few year.

Sampling Unit: -
As this study revolves around the foreign institutional investment and Exchange
Rates. So for the sampling unit is confined for the both i.e. Net Foreign Investment
& Exchange Rates.

Sampling technique

Convenient Sampling- Study conducted on the basis of availability of the Data and
requirement of the project. Study requires the events that have impact foreign
institution investors on exchange rates.

RESEARCH ANALYSIS TOOLS

Regression analysis and Correlation analysis:

regression Analysis: We can analyze that the net investment by FII`S is a

dependent variable and the Exchange Rate is an independent variable.— for
example, impact of FII Investment on the Indian exchange rate can be observed by
change in the Fll`s investment then it can be affect the Exchange rate.

Correlation: This analysis tool and its formulas measure the relationship between
two data sets that are scaled to be independent of the unit of measurement. The
variable Correlation calculation returns the covariance of two data sets divided by
the product of their standard deviations. We can use the Correlation tool to
determine whether two ranges of data move together— that is, whether large
values of one set are associated with large values of the other (positive correlation).
whether small values of one set are associated with large values of the other
(negative correlation). or whether values in both sets are unrelated (correlation near
zero).
DATA COLLECTION

The Secondary sources have been used for the collection of the data used in the
research.

Secondary Data:

Secondary data may be defined as the data that has been collected earlier for some
purpose other than the purpose of the present study. Any data that is available prior
to the. commencement of the research project is secondary data, and therefore
secondary data is. also called as the historical data. Secondary data sources provide
a wealth of information to the researcher. It often. obviates the need of the primary
data collection and saves valuable time, effort and money. Even where subsequent
primary data collection is required an analysis of secondary data enlightens the
researcher regarding many aspect of the study and gives. contextual familiarity for
primary data collection. It thus provides rich insights into the research process. As
there are not possibilities of collecting data personally so no questionnaire is made.
 SOURCES OF SECONDARY DATA:

Secondary Data

Published Sources Unpublished Sources

1. Census report 1. Letters and diaries

2. Biographies and auto
2. Planning commission reports
biographies
and statistics
3. Accounting and financial
3. Government reports
reports

4. Annual reports of RBI, RBI 4. Personnel records

bulletin etc.
In this project, secondary data of these previous years (from 2012 to 2018) has
been collected for the testing of the hypothesis. The data required for the analysis
of the impact OF FII`s on exchange rate dollar vs. INR are
Monthly net follow of the FII investment from April 2012 to March 2018 (RS. in
crore)
Monthly exchange rate dollar vs. INR from April 2012 to March 2018
Sample size
Monthly average closing of exchange rate from April 2012 to 2015 total 100
sampling
Monthly average net inflow investment by FII`s from April 2012 to 2018 total 100
sampling
 LIMITATIONS

1. The result obtained through the regression equation was not accurate. There is
probability of occurrence of error. the error is known as the slandered error
denoted by the S E. the slandered error value is 2.62 in case of the regression
equation of net FII investment on exchange rate , Y = 0.576x- 18992, which
indicate that the estimated FII investment for an expected exchange rate can be
either more or loss by 2.650 crore.

2 . Th e r e l a t i o n s hi p o f F I I i n v e s t me n t a n d Ex c h a n g e R a t e d e n o t e d
b y t h e C o e f f i c i e nt o f Correlation has a probable error with it. The value of C
oefficient of Correlation is 0.063 andthe probable error is 0.672 it can be increase o
r decrease an exchange rate by Rs. 0.672.

3. The calculated values are taken up to 3 decimal places only. Actual value can be
changedif complete values are taken into