Impact of Fii on Indian Economy

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Institute of Professional Education and Research

Macro Economics

Assignment On
Foreign Institutional Investment
(FII)

Submitted To- Submitted By-
Dr. A.K. Sharan Nasir Jalal Roll No. - 29

ABSTRACT

Most of the under developed countries suffer from low level of income and capital accumulation. Though, despite this shortage of investment, these countries have developed a strong urge for industrialization and economic development. As we know the need for Foreign capital arises due to shortage from domestic side and other reasons. Indian economy has experienced the problem of capital in many instances. While planning to start the steel companies under government control, due to shortage of resources it has taken the aid of foreign countries. Likewise we have received aid from Russia, Britain and Germany for establishing Bhiloy, Rourkela and Durgapur steel plants. The present paper is a modest attempt to study the trends in Foreign Institutional Investment into India. It is observed that the FIIs investment has shown significant improvement in the liquidity of stock prices of both BSE and NSE. However, there is a high degree of positive co-efficient of correlation between FIIs investment and market capitalization, FIIs investment and BSE & NSE indices, revealing that the liquidity and volatility was highly influenced by FIIs flows. Further, it is also proved that FIIs investment was a significant factor for high liquidity and volatility in the capital market prices. The present study is a modest attempt to know the status of FIIs in Indian capital market.

The present study tries to examine the determinants of Foreign Institutional Investments in India, which have crossed almost US$ 12 billions by the end of 2002. Given the huge volume of these flows and its impact on the other domestic financial markets understanding the behavior of these flows becomes very important at the time of liberalizing capital account. In this study, by using monthly data, we found that FII inflow depends on stock market returns, inflation rate (both domestic and foreign) and ex-ante risk. In terms of magnitude, the impact of stock market returns and the ex-ante risk turned out to be major determinants of FII inflow. This study did not find any causation running from FII inflow to stock returns as it was found by some studies. Stabilizing the stock market volatility and minimizing the ex-ante risk would help in attracting more FII inflow that has positive impact on the real economy.

PREFACE

As a part of the reform process, the Government of India opened up the Indian capital market to global competition and took measures to initiate structural reforms by putting in place the requisite regulatory and supervisory structure in the form of SEBI. In a move towards current account convertibility and to increase foreign exchange inflows, Foreign Institutional Investors (FIIs) were permitted to invest in the tradable Indian securities such as shares, debentures, bonds, mutual fund units etc. through primary and secondary markets as per guidelines issued by Government of India in September 1992.Gurucharan Singh (2004) highlighted that the securities market in India has come a long way in terms of infrastructure, adoption of best international practices and introduction of competition. Today, there is a need to review stock exchanges and improve the liquidity position of various scrips listed on them. A study conducted by the World Bank (1997) reports that stock market liquidity improved in those emerging economies that received higher foreign investments. Calvo, et al., (1999) suggest that foreign investors purse irrational trading strategies such as herding and quick changes in sentiments that make the emerging stock markets volatile. They argue that information disadvantage and diversified...
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