Role of Fiis

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A major development in our country post 1991 has been liberalization of the financial sector, especially that of capital markets. Our country today has one of the most prominent and followed stock exchanges in the world. Further, India has also been consistently gaining prominence in various international forums, though we still have a long way to go.

Developing countries like India are generally capital scarce. This is because levels of income are lower in comparison to other developed countries, which in turn means savings and investments are also lower. The most of FIIs portfolio is concentrated is top large cap stocks which was their bearish phase strategy, ,now with the recovery in the equity market and valuations turning attractive they are likely to widen their exposure in Indian stock market .FIIs are the major source of liquidity for the Indian market . If FIIs are investing huge amount in the Indian stock markets then it reflects their high confidence and a healthy investors sentiments for the market . The entry of FIIs in India has brought mixed consequences for the market. They have improved the breadth and depth of the Indian market.

There are two type of investments in India one is FIIs And other one is FDI. The FIIs are invested in stock market while the FDI is invested in anywhere of the country. Foreign Direct Investment (FDI) of Portfolio Investment (better known as Institutional Investment ). The difference between the two is subtle. Let’s look into FDI first. FDI is defined as “investment made to acquire lasting interest in enterprises operating outside of the economy of the investor.” Examples of FDI would include POSCO setting up a steel plant in Orissa (in-bound FDI), Tata buying Arcelor (out-bound FDI) and so on.

On the other hand, FII is used to denote an investor, who invests money in the financial markets of a country different from the one in which that investor is incorporated. So, if you as an Indian decide to invest in the US stock markets, it is an out-bound foreign institutional investment. Similarly, suppose a rich American millionaire invests in the Indian stock markets, it would be termed as in-ward FII. The FIIs Shows in the stock market ,firstly the spectacular rise of the Sensex over the past few months! Secondly, we can see how volatile FII flows are. It is almost impossible to predict whether FIIs will be net sellers or net buyers tomorrow! What is more important is that there is no rigid relationship between the Sensex and FII flows. Statisticians use a measure known as the correlation coefficient, which is used to depict a relationship between two variables mathematically. This coefficient ranges from minus 1 to plus 1. So, if we consider two variables, and the coefficient is -1, it means that when one moves up, the other moves down in the same proportion. When it is 1, it means when one moves up or down, the other also moves in the same manner, and when it is zero, it means there is no correlation. So when one moves up (or down), there’s no way to figure out how the other variable will behave.

So basically, one can compute the correlation coefficient between the Sensex and FII flows. I found it to be 0.13 over a 21 month period. This is a very weak correlation, though it cannot be ignored entirely. But if they are so weakly correlated, then why do they grab the headlines.

Well, that’s because we need to “look beyond the numbers”! In any kind of market, financial or real, investor sentiment and psychology play a crucial role. This is something that just cannot be captured in a few numbers. Now an in-depth explanation of investor psychology is not possible here, but I can give a few examples of it. For instance, when the stock markets rise, they just seem to be rising. Experts and academicians have studied the behavior of investors, and found that frenzy and greed drive investors during a bull run, and especially when a bull...
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