Dynamics of FII Investment and Stock Market Returns in India: An Empirical Analysis

This study examined the trend of Foreign Institutional Investors' (FIIs) investments and the Indian stock market and the relationship between FIIs net investment and Indian stock market returns for the period of 11 years from April 2000 to March 2011, on a daily basis. The trends of the Indian stock market in 18 years from 1993-74 to 2010-11 were abundant and CAGR of FIIs investment over 18 years recorded 18.6%, and Nifty and Sensex recorded 9.53% and 9.3% respectively. While examining FIIs net investment and the Indian stock market behaviour for the study period, they had positive correlation (0.201 for nifty and 0.204 for Sensex). The study analyzed the relationship on a yearly basis, the study documented that in all years of the study period (except 2000-01 for Sensex), they had positive correlation but the quantum of correlations were meager until 2004-05, in later years, correlations were stronger than the earlier period. The researchers concluded that the FIIs net investment and the Indian stock market were positively and significantly correlated during the study period. However, when the entire period was subdivided and analyzed, it was found that the influence of FII net investment had been higher in the latter period, meaning that it had started to have more influence on the stock market of late.