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A STUDY OF IMPACT OF FII'S ON INDIAN STOCK MARKET WITH REFERENCE

TO BSE

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© 2019 IJRAR June 2019, Volume 6, Issue 2 www.ijrar.org (E-ISSN 2348-1269, P- ISSN 2349-5138)

A STUDY OF IMPACT OF FII’S ON INDIAN

STOCK MARKET WITH REFERENCE TO
BSE.

1
Prof.Pradip.S.Thombare, 2Dr.R.M.Chitnis
1
Assistant Professor, 2Principal MITSOM-WPU-Pune,
1
Management,
1
Sinhgad Institute Of Management, Pune, India

Abstract:
Capital is considered to be very important growth in any economy. In case of developing country like

India Domestic capital is not sufficient to fulfil the requirement of economy. In that case foreign capital

plays a very important role. Foreign Capital comes in two forms-FDI and FII. FDI is considered as a

more stable form of foreign capital as compared to FII. But, FII inflows and outflows directly create

impact on stock market. Hence FIIs have emerged as movers and shakers of Indian Stock Market. This

paper examines the trend and pattern of FII flow in India and also examines the relationship between

FII and Sensex. The study takes 17 years data into consideration. To study the impact of FII on Indian

stock market, Sensex was selected in the study, as it is the most systematic stock market indices and

widely used by market participants for benchmarking.

Key Words: FII, Sensex, Stock Market

Introduction:

The Foreign Institutional Investors (FIIs) have emerged as remarkable players in the Indian stock

market and their growing contribution adds as an important feature of the development of stock markets

in India. As a result, the Indian Stock Markets have reached new heights and became more volatile

making the researches work in this dimension of establishing the link between FIIs and Stock Market

volatility. Hence, it’s an interesting topic to ascertain the role of FIIs in Indian Stock Market.

After the launch of the reforms, foreign institutional investors (FIIs) from September 14, 1992, with

suitable restrictions, were permitted to invest in all securities traded on the primary and secondary

markets, including shares, debentures and warrants issued by companies which were listed or were to be

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listed on the Stock Exchanges in India and in schemes floated by domestic mutual funds. A positive

contribution of the FIIs has been their

role in improving the stock market infrastructure and the SEBI assured its contribution towards its

development.

Hence, in this age of transnational capitalism, a significant amount of capital is flowing from developed

world to emerging economies. Positive fundamentals combined with fast growing markets have made

India an attractive destination for foreign institutional investors (FIIs). Although the Foreign

institutional investors (FIIs), whose investments are often called 'hot money' because they can be pulled

out at any time, have been blamed for large and concerted withdrawals of capital from the country at the

time of recent financial crisis, they have emerged as important players in the Indian capital market.

Review of Literature:

Douma, Kabir and Rejie (2006) investigated the impact of foreign institutional investment on the

performance of emerging market firms and found that there is positive effect of foreign ownership on

firm performance. They also found impact of foreign investment on the business group affiliation of

firms. (Aggarwal, Klapper and Wysocki, 2005) observed that foreign investors preferred the companies

with better corporate governance.

Mukherjee (2002) examined the various probable determinants of FII and concluded (1) Foreign

investment flows to the Indian markets tend to be caused by return in the domestic equity market; (2)

returns in the Indian equity market is an important factor that has an impact on FII flows; (3) whereas

FII sale and FII net inflow are significantly affected by the performance of the Indian equity market, FII

purchase show no such affect to this market performance; (4) FII investors do not probably use Indian

equity market for the purpose of diversification of their investment; (5) returns from the exchange rate

variation and the fundamentals of the economy may have an impact on FII decisions, but such influence

do not prove to be strong enough.

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Gordon and Gupta, (2003) found causation running from FII inflows to return in BSE. They observed

that FIIs act as market makers and book profits by investing when prices are low and selling when they

are high. Hence, there are contradictory findings by various researchers regarding the causal

relationship between FII net inflows and stock market capitalization and returns of BSE/ NSE.

Therefore, there is a need to investigate whether FIIs are the cause or effect of stock market fluctuations

in India.

Rajesh Chakraborty (2001) in his research paper titled „FII Flows to India: Nature and

Causes‘concluded that since the beginning of liberalization FII flows to India have steadily grown in

importance. The author analyzed these flows and their relationship with other variables Pal, P. (2004)

found that FIIs are the major players in the Indian stock market and their impact on the domestic market

is increasing. Trading activities of FIIs and the domestic stock market turnover indicates that FII‟s are

becoming more important at the margin as an increasingly higher share of stock market turnover is

accounted for by FII trading in India.

Objectives of Study:

a) To study the trends and patterns of foreign capital flow into India in the form of FII

b) To study the relation and impact of Foreign Institutional Investment (FII) on Indian stock market

(Sensex).

Scope of Study:

The study takes 17 years data into consideration. To study the impact of FII on Indian stock market,

Sensex was selected in the study, as it is the most systematic stock market indices and widely used by

market participants for benchmarking.

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Research Methodology:

Data Collection: This study is based on secondary data. The required data related to FII have been

collected from various sources i.e. Bulletins of Reserve Bank of India, publications from Ministry of

Commerce, SEBI Handbook of Statistics, Govt. of India. BSE Sensex data is down loaded from the

websites of BSE. Daily closing index value are taken and averaged to get the index value for each year,

which is considered as more representative figure of index for the entire year. The current study

considers 17years data starting from 2002 to 2018.

Analytical tools and technique: In order to analyze the collected data the statistical tools such as

correlation and egression is used. Correlation coefficient is a statistical measure that determines the

degree to which two variable's movements are associated. Correlation coefficient value ranges from -1

to 1. Negative value of correlation indicates: if one variable increases in its values, the other variable

decreases in its value and positive value indicates: if one variable increases in its values the other

variable also increases in its value. In the current study to study the linear relationship between variables

such as FII and SENSEX correlation is applied. The regression analysis is a statistical technique used to

evaluate the effects of Independent variables on a single dependent variable. In the current paper

attempt is made to study the impact of FII on Sensex.

Hypothesis:

(1) H0: There is no significant relation between FII and BSE Sensex.

(2) H0: There is no significant impact of FII on BSE Sensex.

Data Analysis:

The following table gives the Net purchases by FII in Indian stock market from year 2002 to 2018. It

also gives Average value of closing value of Sensex from 2002 to 2018.

It shows that Net flow of FII has considerably increased from year 2002 to year 2018 with certain

declining values in certain years. BSE Sensex has also increased from the 2002 to 2018.

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Flow of FII and BSE Sensex

Year SENSEX NET FII (Cr)
2002 3377.28 3677
2003 5838.96 35153
2004 6602.69 42049
2005 9397.93 41663
2006 13786.91 40589
2007 20286.99 80914
2008 9647.31 -41215
2009 17464.81 87987
2010 20509.09 179674
2011 15454.92 39352
2012 19426.71 163350
2013 21170.68 62287
2014 27499.42 256211
2015 26117.54 63662
2016 26626.46 -23079
2017 34056.83 20048
2018 36068.33 -83254
Source: BSE , NSDL

Data analysis for the Period 2002-2010:

Regression
Statistics
Multiple R 0.714834413
R Square 0.510988238
Adjusted R Square 0.429486278
Standard Error 4481.620663
Observations 8

ANOVA
df SS MS F
Regression 1 125925312.4 125925312.4 6.269644
Residual 6 120509542.6 20084923.76
Total 7 246434855

Coefficients Standard Error t Stat P-value

Intercept 8987.321979 2237.160111 4.017290463 0.00698
3677 0.067770277 0.027065611 2.503925625 0.046282

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Obsrvations:

 From the above table we can see that R square is o.5109. That means there is a positive correlation between FII
and Sensex.

 From the above table P value 0.0462 is less than 0.05. We can reject the Null hypothesis.

 As the f value= 6.269 > than 0.05. There is no significant impact of FII on Sensex. We can accept the Null
Hypothesis 2.

Data analysis for the period 2011-2018:

Regression Statistics
Multiple R 0.541240106
R Square 0.292940852
Adjusted R Square 0.151529022
Standard Error 5627.97344
Observations 7

ANOVA
Significance
df SS MS F F
Regression 1 65614266.37 65614266 2.071544 0.209604772
Residual 5 158370425.2 31674085
Total 6 223984691.6

Standard
Coefficients Error t Stat P-value
Intercept 29183.6068 2504.513147 11.65241 8.18E-05
39352 -0.029003816 0.020151531 -1.43929 0.209605

Observations:

 From the above table we can see that R square is o.5412. That means there is a positive correlation between FII
and Sensex.

 From the above table P value 0.209 is greater than 0.05. We can reject the Null hypothesis 1.

 As the f value=0.209 is > than 0.05. There is no significant impact of FII on Sensex. We can accept the Null
Hypothesis 2

Findings of the study:

 FII flows in terms of net purchases have shown increasing trend from the year 2002 to year 2018.

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 BSE Sensex has increased from year 2002 to year 2018.

 There is a positive correlation between FII and BSE Sensex stock market index. There is a relation

between FII and Sensex.

 There is no significant impact of FII on Sensex.

Conclusion:

The Flow of FII has advanced significantly in last 17 years from the year 2002 to year 2018 and there is a

correlation between such FII flows and changes in stock market indices like nifty. R-square is also found

to be very average means other factors might be contributing towards volatility of Indian stock market. As

the correlation is not found to be strong some other factors can have impact and relations with stock

market which requires further investigation and application of other statistical models to look into this

research.

REFERENCES

1) Douma, S., Kabir, R. and Rejie, G. (2006). “Foreign and domestic ownership, business groups and firm
performance-Evidence from large emerging market”,

Strategic Management Journal, Vol. 27, No. 7, pp. 637-657.

2) Aggarwal, R., Klapper, L. & Wysocki, P. D. (2005). “Portfolio preferences of foreign institutional
investors”, Journal of Banking and Finance, Vol. 29, No. 12, pp. 2919-2946.

3) Gordon, J. and Gupta, P. (2003). “Portfolio Flows into India : Do Domestic Fundamentals Matter?”
IMF Working Paper, Number WP/03/02.

4) Chakrabarti, R. (2001). “FII Flows to India : Nature and Causes”, Money and

Finance, Vol. 2, No. 7.

5) Mukherjee (2002) “Taking Stock of Foreign Institutional Investors.” Economic and Political Weekly.
June 11, 2005. <www.rbi.ord.in>,www.sebi.gov.in

6) Pal, P. (2004),” Foreign Institutional Investment in India”, Research on Indian Stock Volatility. Vol 12.
Publisher: Emerald Group Publishing Limited

7) www.sbi.oov.in

8) www.bse.in

9) www.nsdl.in

10) www.csdl.in
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