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Abstract
This paper tries to explore the causal relationship between Foreign Institutional Investment (FII) and Indian Stock Market Further, the paper examines whether they individually create impact on certain selected macroeconomic variable sand vice versa. Sensex is taken as a representative of Indian Stock Market Inflation as measured by Wholesale Price Index (WPI), national output as represented by Index of Industrial Production (IIP) and Exchange Rate are the three macroeconomic variables considered for the study. The monthly data of the selected variables for the period from April 2005 to March 2013 is taken for the study. Correlation and Granger causality test have been used to study the causal relationship between FII & Sensex and their causal relationship with the macroeconomic variables. Our results show that a) there is a bidirectional relationship between FII and Sensex, FII and Exchange Rate b) there is unidirectional relationship between Sensex and IIP, Sensex and WPI, FII and IIP & FII and Exchange Rate and c) there is no relationship between FII and WPI.
Key Words: FII, Sensex, WPI, IIP, Exchange rate and Granger causality test
(ProQuest: ... denotes formulae omitted.)
1. Introduction
Indian capital market has witnessed tremendous developments since 1991, when the government had adopted liberalization and globalization policies. Financial liberalisation resulted in the opportunity of foreign investors investing in domestic securities and domestic investors transacting in foreign securities. Capital inflows to emerging economies exceeded their developed counterparts. According to HSBC, in 2009-12, emerging economies of Asia have received capital flows worth $ltrillion which is 484% more than inflows in the preceding four years (Nguyen, 2014). During this period, India received US $93 billion as inflows which is over two times her inflows of US $40 billion received in 2005-08. Positive fundamentals combined with fast growing markets made India an attractive destination for Foreign Institutional Investors (FII) (Prasanna, 2008). Progressive liberalisation process coupled with strong economic growth made India a favoured destination for foreign investors.
Table 1 shows the FII inflows from Equity, Debt and Net Inflows from 2005-05 to 2012-13. However, the fact that volatility in FII inflows and its significant impact on the Indian stock market cannot be ignored. Throughout 2008, many times, the Sensex lost around 600-1500 points on intraday trading owing to...