Fiis and Its Growth in India

Topics: Investment, Stock market, Capital accumulation Pages: 9 (2659 words) Published: May 3, 2013

 The developing countries especially the emerging market economies opened up by unleashing capital controls to attract foreign capital from more than a decade in addition to domestic capital to stimulate economic growth and output. Since then, portfolio flows from foreign institutional investors (FII) have emerged as a major source of capital for emerging market economies (EMEs) such as Brazil, Russia, India, China and South Africa. This had increased the competition among the EMEs in attracting more FIIs. In the last decade India has recorded a net portfolio flows of US$ 106 .In spite of the substantial growth in FIIs in India it had also been highly volatile and unexpected at times due to various reasons viz., changes in government policies, economic recession, political in stability, fluctuation in stock market/currency value etc.,. Therefore it becomes apparent to study the trends of FII inflows in India, to understand the reason behind its lags and follow the growth strategies when it has outperformed.

Keywords: Foreign Institutional Investors (FII), Portfolio Investment, Emerging Market Economies (EMEs).

Dr. Raechel Nancy Philip, Principal, Tirupur Kumaran College of Arts & Science for Women, Tirupur. Mrs. V. B.Mathipurani, Research Scholar, Department of International Business, Tiruppur Kumaran College of Arts & Science for Women, Tirupur.


Though there were many forms of restriction in foreign institutional investments inflow in many countries including India, from the early nineties it has started to attract FII inflows significantly.Portfolio investments brought in by FIIs have been the most dynamic source of capital to emerging markets from the year 1992 after the liberalization of the policies in India. The firms were interested in attracting foreign capital because it helps to create liquidity for both the firm’s stock and the stock market in general. This leads to lower cost of capital for the firm and allows firm to compete more effectively in the global market place. This directly benefits the economy and the country. The positive investment climate and the economic growth have made India an attractive destination to FIIs to pour in foreign capital. However, there also exists an unappreciable volatility of FII inflows and its impact on stock market and the Indian economy. FII Related Studies

Some of the related reviews collected on FII are summarised in this sub-section. Froot, O’Connell and Seasholes (2001) found that international capital flows predict” price changes, i.e., lead changes in the prices of securities. They observed that a 1 basis point shock to international portfolio flows results in a 40 basis point increase in equity prices. Stanley Morgan (2002) has examined that FIIs have played a very important role in building up India’s forex reserves, which have enabled a host of economic reforms. Secondly, FIIs are now important investors in the country’s economic growth despite sluggish domestic sentiment.Gordon and Gupta (2003) found that FII inflows display seasonality and are significantly higher in the first four months of each calendar year, reflecting funds earmarked for tax saving investments and year-end bonuses. This trend can be attributed to the presentation of a generally reform-oriented Union Budget by the Government of India in the month of February every year. S SS Kumar (2006) finds that the market movement can be explained Dr. Raechel Nancy Philip, Principal, Tiruppur Kumaran College of Arts & Science for Women, Tirupur. Mrs. V. B.Mathipurani, Research Scholar, Department of International Business, Tiruppur Kumaran College of Arts & Science for Women, Tirupur.

using the direction of the funds flow from these investor, highlighting the growing participation of Institutional Investors, both foreign institutional investors and the Indian mutual funds combined...

References: 2. Froot, Kenneth A., Paul G. J. O’Connell, and Mark S. Seasholes. 2001. “The Portfolio Flows of International Investors.” Journal of Financial Economics 59 (1): 151–93.
3. Gordon, James, and Poonam Gupta. 2003. “Portfolio Flows into India: Do Domestic Fundamentals Matter?” IMF Working Paper No. 03/20, January.
6. Stanley Morgan (2002), “FII’s influence on Stock Market”, Journal: Journal of impact of Institutional Investors on ism. Vol 17. Publisher: Emerald Group Publishing Limited.
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