An Assessment of FII Investments in Indian Capital Market

XI Capital Markets Conference, 21-22 December 2012, Indian Institute of Capital Markets (UTIICM)

15 Pages Posted: 1 May 2013

See all articles by Harendra Kumar Behera

Harendra Kumar Behera

Government of India - Reserve Bank of India

Date Written: December 21, 2012

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.

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 1992-93 to over Rs.66,000 crore in 2007-08 before it turning to a net disinvestment of Rs. 45,811 crore in 2008-09, on an annual basis. In subsequent period, it increased sharply to Rs. 1,46,438 crore in 2011-12. 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 1996-97 to Rs.49,988 crore in 2011-12, 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 2008-09 global crisis, made balance of payments management difficult and led the Indian rupee to depreciate significantly.

Keywords: Foreign Institutional Investment, GARCH, Liquidity, Volatility

JEL Classification: G23, G12, C22

Suggested Citation

Behera, Harendra Kumar, An Assessment of FII Investments in Indian Capital Market (December 21, 2012). XI Capital Markets Conference, 21-22 December 2012, Indian Institute of Capital Markets (UTIICM) . Available at SSRN: https://ssrn.com/abstract=2258352 or http://dx.doi.org/10.2139/ssrn.2258352

Harendra Kumar Behera (Contact Author)

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

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