GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013

A Study of Influence of FII Flows on Indian Stock Market

*Anubha Shrivastav

Abstract

Since Indian stock market is vast and attract investors as a hotspot of investment .The Indian market is steadily growing and had allured domestic investors community and foreign investors group in the past .the major part of investment in Indian market is attributed to institutional investors among whom foreign investors are of primary importance . one eminent concern in the matter is whether these foreign investors (FII) direct the Indian stock market .This paper examines whether market movement can be explained by these investors and their impact on the stock markets. FII, because of its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. The present paper is an attempt to find out determinants of foreign institutional investment in India, a country that opened its economy to foreign capital following a foreign exchange crisis. The objective of the study is to find out whether there exist relationship between FII and Indian stock market . Key terms FII, Indian stock market , influence of FII on Indian stock market , correlation and regression , Trends of FII in India etc.

*Senior Lecturer, Amity Business School

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013

A Study of Influence of FII Flows on Indian Stock Market Introduction With rapid changes in the economy because of liberal economic policies and fast pace changes due to globalisation, Indian market has become a focus point for foreign investors. Organisations tend to target for large volume of trade in this era of globalisation. Trade flows are indeed one of the most visible aspects of globalization. International investment is a powerful source in propelling the world toward closure economic integration.FII refers to the investment made by resident of one country in the financial capital and asset of another country It facilitates and persuades large productivity and help in shaping up balance of payments. FII flows in India have continuously grown in importance. This paper has been divided into following nine sectionsSection I.Review of Literature Section IINeed of the study Section III..Objective of the study Section IV......Research methodology Section V...Limitation of the study Section VI.. FII and Indian stock market Section VII............................... .FII Trends in India Section VIII.......Data Analysis Section IX.................................Key findings Section X...................................Conclusion & recommendations

Section I Review of literature -. Kulwantraj N. Bindu (2004),1 in his research paper titled A study on the determinants of foreign Institutional Investments in India and the role of risk, inflation and return had conducted an intensive study to find out the determinants responsible for the flow of FIIs and their degree of impact. With the help of monthly data they found out that FII inflow depends on stock market returns, inflation rates (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 the major determinants of FII inflow. The study has not found any causative link running from FII

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 inflow to stock returns. Raj Chaitanya (2003),2 in his research work titled Foreign Institutional Investments discussed in length about the FIIs and their impact on the Indian economy. Analyzing daily flow data, he concludes that the stock market performance has been the sole driver of FII flows, though monthly data in the pre-Asian crisis period suggests some reverse causality. Krishna Reddy Chittedi(2009),3 in his research work titled Volatility of Indian Stock Market and FIIs analyzed the performance of sensex v/s. FIIs and some of the most talked about movements of the sensex, starting with the secondary market summary of each year. Foreign investments in BSE reveals that the liquidity as well as volatility was highly influenced by the FII flows. FIIs are significant factor in determining the liquidity and volatility in the stock prices. With thorough analysis regarding the stock market in last 2 years, it was concluded that stock market touched its peak at 21000 but then crashed badly. Rao (1999),4 in their study of foreign institutional investments and Indian stock market found that the net FII investments influence the stock prices in India .In the similar line Chakrabarti and Vimal (2001),5 concluded in their study that in the pre-Asian crisis period any change in FII was found to have a positive impact on the equity returns, whereas in the post- Asian crisis the reverse relationship was noticed. FIIs were a major portion of investments and their roles in determining the movement of share price and indices is considerably high. The movement of indices in India depends only on the trade done in limited number of stocks. Thus, when the FIIs frequently buy and sell stocks , it leads to volatility of the market. Trivedi and Nair (2005),6 in their study examined the volume of foreign investment and profit booking in Indian market and thereby suggested that, given the huge volume of investments, the foreign investors can play as market makers and book their gains. They can also buy financial assets when the prices are declining and sell when the asset prices are increasing. Hence there may exist a bi-directional relationship b/w FII and equity stockreturns.The study conducted by Gordon and Gupta (2002)7 on the portfolio flows in India and the influence of domestic fundamental factors, it was found that there exists a strong impact of the domestic fundamentals on the investment flows into India. They used the data from September 1992 till October 2001 and applied regression model and unit root test. It was concluded that the portfolio flows to India are small, compared to other emerging markets and also less volatile. The combination of domestic, regional and global variables are important in the determination of the portfolio flows into India. Another study conducted by Kumar (2002)8 on the role of institutional investors (including the FIIs) in Indian equity market, concluded that

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 FIIs and Indian mutual funds combined together are the most powerful and influential force in driving the Indian market. Mukherjee (2002)9 examined the various probable determinants of FII and concluded (1) Foreign investment flows to the Indian markets tend to be caused by return in the domestic equity market; (2) returns in the Indian equity market is an important factor that has an impact on FII flows; (3) whereas FII sale and FII net inflow are significantly affected by the performance of the Indian equity market, FII purchase show no such affect to this market performance; (4) FII investors do not probably use Indian equity market for the purpose of diversification of their investment; (5) returns from the exchange rate variation and the fundamentals of the economy may have an impact on FII decisions, but such influence do not prove to be strong enough. Batra, A (2004)10 in his research work has analyzed the trading behaviour of FIIs and their impact of trading biases upon stock market volatility. It was found that there is a strong evidence for the fact that FIIs on daily basis have been positive investors and trend chasers at the aggregate level. But there seem to exist no evidence of positive feedback trading on monthly basis. The research work also indicates that the foreign investors have a tendency to herd together in their trading activity in India. The trading behaviour/biases of the FIIs do not appear to have a destabilizing impact on the equity market. Dhwani Mehta (2009),11 in her research work titled A Study: FII Flows in India The Indian stock markets have been experiencing humungous amount of FII flows. This has affected small investors thinking that markets are rigged. For the good news to Indian investors it has been established that out of all the factors, it is basically the performance of Indian stock markets vis--vis other emerging and developed markets that probably may cause returns and not the other way round. Mohan, T.T. (2005)12 concludes that the crossover funds in the emerging markets form only a very small component of global portfolios and hence they are somewhat a bit less vulnerable to fluctuations to stock returns arising from changes in fundamental and economic conditions in emerging markets. Rai, K. and N. Bhanumurthy (2004)13 examined the role of return, risk and inflation as determinants of foreign institutional investors in the context of India. They found that FII inflow depends on stock market returns, inflation rates (both domestic and foreign) and ex-ante risk. In terms of magnitude, the impact of market returns and the ex-ante risk turned out to be the major determinants of FII inflow. They have also found that there is any causative link running from FII inflow to stock returns. And in the last, they have suggested that the stabilizing the stock market volatility and minimizing the ex-ante risk would help to attract more FII, an inflow of

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 which have a positive impact on the real economy. Rajesh Chakraborty(2001)14 in his research paper titled FII Flows to India: Nature and Causes concluded that since the beginning of liberalization FII flows to India have steadily grown in importance. The author analysed these flows and their relationship with other variables Pal, P. (2004)15 found that FIIs are the major players in the Indian stock market and their impact on the domestic market is increasing. Trading activities of FIIs and the domestic stock market turnover indicates that FIIs are becoming more important at the margin as an increasingly higher share of stock market turnover is accounted for by FII trading in India. Bhupender Singh (2005),16 in his research work titled Inter-Relation Between FII, Inflation and Exchange Rate discussed about as to how the financial sector of an economy plays a vital role in attracting the Foreign Institutional Investment inflows. The study tries to examine the extent of effect of significant macroeconomic variables; inflation and exchange rate on the flows of Foreign Institutional Investment in India.He has tried to analyze the inter-relation between Foreign Institutional Investment, Exchange Rate and Inflation. Given the large volume of these flows and their impact on domestic financial markets; understanding the major determinants of these flows becomes imperative as the economy has now moved towards full capital account convertibility. Narayan Sethi (2007)17Globalisation, Capital Flows and Growth in India: Capital flow is of importance, when the magnitude of those flows is steady and stable. The international capital flow like direct and portfolio flows has great contribution to impact the economic behavior of the countries in a positive way. .

Section II Need of the study- Since the beginning of liberalization FII flows to India have steadily grown in importance. Foreign capital flows have come to be acknowledged as one of the important sources of funds for economies that would like to grow at a rate higher than what their domestic savings can support. This resulted in the integration of global financial markets. As a result, capital started flowing freely across national borders seeking out the highest rate of return. India is considered as a good investment option by world investors in spite of political differences and lack of infrastructure facility etc. Indian market presents vast potential and alluring and

encouraging foreign investors continuously.The FII flows were close to $15bn in the last three months of 2009. However the SEBI statistics reveal that the FIIs are seen as the net sellers in the Indian markets, they sold securities worth Rs 7236.8 crores since 2008 . On January 21 2008,

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 BSE Sensex saw the largest ever fall in record, BSE shack by 2000 points intra-day. In this regard everyones query is whether the FII positions have caused Indian markets as we see most often vie versa. Foreign portfolio inflows through FIIs, in India, are important from the policy perspective, especially when the country has emerged as one of the most attractive investment destinations in Asia. This paper reveals if the FIIs influence the Indian Equity Market. The present study also focuses on their investment pattern in the Indian stock market. It examines the factors expected to affect the investment decisions of FIIs. The Foreign Institutional Investors (FIIs) have emerged as important players in the Indian equity market in the recent past. This paper makes an attempt to understand whether there exists a relationship between FII and Equity Market returns in India. Section III Objective of the study-Following are the objective of the study To find out the relationship between FII and Indian Stock Market. To determine the behavior and trend of FIIs on Indian stock market To determine the factors that influence investment decision of FIIs. To examine whether FIIs have any influence on various BSE indices Section IV Research methodology- The report examines The Influence of Foreign Institutional Investments on Equity Stock Market in India. The scope of the research comprises of information derived from secondary data from various sources. The various information and statistics were derived from the different sources e.g. websites journals , books etc. Sensex and Nifty was a natural choice for inclusion in the study, as it is the most popular market indicies and widely used by market participants for benchmarking. The study period covered under this is for the years 20012010. The study conducted is empirical in nature and hence descriptive research has been conducted. The main source of obtaining necessary data for the study was Secondary Data. This study is empirical in nature and hence secondary data is used to conduct the research. The secondary data constitutes of daily FII flows data and the daily returns of SENSEX and NIFTY from BSE and NSE websites respectively. The analysis has been made by, correlating the FII purchases, sales and net investment with equity market returns to identify whether a relation exists between them. Findings are included which transmits the important points, which were gathered from the study. Regression and correlation techniques have been used for analysis

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 purpose .The sample data consists of 143 observations for FII, Sensex and S&P CNX Nifty starting from April 1998 to December2010. The sample for other four indices of BSE consists of 143 observations starting from January 1999 to February 2010. The monthly closing index of all the indices and monthly average of net investments made by FII have been taken for the purpose of the study. The FIIs started investing in Indian capital market from September 1992. The number of scrips under following index are: BSE Sensex 30 NSE Nifty 50 BSE Consumer Durables (CD) 22 BSE Capital Goods (CG) 49 BSE Fast Moving Consumer Goods (FMCG) 44 BSE Information Technology (IT) 42

Indices BSE Sensex BSE CD BSE CD BSE FMCG BSE IT S&P CNX NIFTY

Period of Study 1 Jan00- Dec10 1 Jan00- Dec10 1 Jan00- Dec10 1 Jan00- Dec10 1 Jan00- Dec10 1 Jan00- Dec10

Observation 132 ( 12 m *11 years) 132 132 132 132 132

HYPOTHESIS Null Hypothesis (Ho): There is no influence of FIIs on the Stock indexes. Alternative Hypothesis (Ha): There is an influence of FIIs on Stock indexes.

If we reject the Ho, then we accept the Ha, setting the significance level to 5% and 1% at Degree of Freedom = n-2.

Section V Limitation of the study -As the time available is limited and the subject is very vast the study is mainly focused on identifying whether there does exist a relationship between FIIs and Indian

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Equity Stock Market. It is mainly based on the data available in various websites. The inferences made are purely from the past years performance. Section VI FII and Indian stock market -Foreign Institutional Investors is used to denote an investor, it is mostly of the form of a institution or entity which invests money in the financial markets of a country. The term FII is most commonly used in India to refer to companies that are established or incorporated outside India, and is investing in the financial markets of India. These investors must register with the Securities & Exchange Board of India (SEBI) to take part in the market. Over the past ten years, foreign investment has grown at a significantly more rapid pace than either international trade or world economic production generally. From 1980 to 1998, international capital flows, a key indication of investment across borders, grew by almost 25% annually, compared to the 5% growth rate of international trade. This investment has been a powerful catalyst for economic growth. But as with many of the other aspects of globalisation, foreign investment is raising many new questions about economic, cultural and political relationships around the world. Flows of investment and the rules that govern or fail to govern it can have profound impacts upon such diverse issues as economic development, environmental protection, labour standards and economic stability. India opened its stock market to foreign investors in September 1992, and in 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equities. This has become one of the main channels of FII in India for foreigners. Initially, there were many terms and conditions which restricted many FIIs to invest in India. But in the course of time, in order to attract more investors, The major source (almost 50%) of money the FIIs invest is from the issue of Participatory Notes (P-Notes) or what are sometimes called Offshore Derivatives. They are instruments used by foreign investors that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian stock markets. For example, Indian-based brokerages buy India-based securities and then issue Participatory Notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. That is why they are also called Offshore Derivative Instruments. According to analysts, the upward revision of economic growth from 5.8 per cent to 6.1 per cent, better-than-expected performance of companies in the quarter endedJune 30, the proposed new direct taxes code that might lead to savings in the tax payers money, and the trade policy with an ambitious target of US$ 200 billion exports for 2010-11 have all

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 revived the confidence of FIIs investing in India. FIIs have made net investments of US$ 10 billion in the first six months (April to September) of 2009-10. A major portion of these investments have come through the primary market, than through buying via secondary markets. FII inflows into Indian equities have been steady ever since the markets were opened up to FIIs in 1993. With the exception of FY99 and FY09, net flows have been positive. FIIs own a dominant 16% of Indian equities (worth US$147bn) and account for 10-15% of the equity volumes. *(Source: CLSA Asia-Pacific Markets) Although FIIs pulled out US$ 9.77 billion of the Indian equity markets during FY09, they have been quick to return in FY10 and within just the first four months they have nearly made up for the exit, reinvesting US$ 8.50 billion or 87% of the amount that they had pulled out in FY09. **(Source: CLSA Asia-Pacific Markets). Foreign Institutional Investors (FII) include the following foreign based categories:

Pension Funds Mutual Funds Investment Trust Insurance or reinsurance companies Investment Trusts Banks Endowments University Funds Foundations Charitable Trusts or Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs:

Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders

Financial instruments available for FII investmentsa. Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; b. Units of mutual funds;

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 c. Dated Government Securities; d. Derivatives traded on a recognized stock exchange; e. Commercial papers. Govt. of India has put investment limits on FIIs . Because capital flows can also affect the exchange rate of a nation's currency, a quick withdrawal of investment can lead to rapid decline in the purchasing power of a currency, rapidly rising prices (inflation) and then panic buying to avoid still higher prices. In short, such quick withdrawals can produce widespread economic crisis. This was partly the case in the Asian Economic Crisis that began in 1997. Although the economic turmoil began as a result of some broader shifts in international economic policy and some serious problems within the banking and financial sectors of the affected East Asian nations, the capital flight which ensued -- some compared it to the great financial panics which took place in the United StatesPositive correlations have often been held as evidence of FII actions determining Indian equity market returns. However, correlation itself does not imply causality. A positive relationship between portfolio inflows and stock returns is consistent with at least four distinct theories: 1) the omitted variables hypothesis; 2) the downward sloping demand curve view; 3) the base-broadening theory; and 4) the positive feedback strategy view. The omitted variables view is the classic case of spurious correlation that the correlated variables, in fact, have no causal relationship between them but are both affected by one or more other variables missed out in the analysis. The downward sloping demand curve view contends that foreign investment creates a buying pressure for stocks in the emerging market in question and causes stock prices to rise much in the same way as suddenly higher demand for a commodity would cause its price to rise. The base-broadening argument contends that once foreigners begin to invest in a country, the financial markets in that country are now no longer moved by national economic factors alone but rather begin to be affected by foreign market movements as well. As the market itself is now affected by more factors than before, its exposure to domestic shocks decline. Finally the positive feedback view asserts that if investors chase returns in the immediate past (like the previous day or week) then aggregating their fund flows

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 over the month can lead to a positive relationship in the contemporaneous monthly data. In the present context, both directions of causation are equally plausible. Section VII FII Trends in IndiaTable 1 Yearly Trend of FII flow FIIs were allowed to invest in capital market securities since September 1992. However, these YEARLY YEAR 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 TREND 141627.1 85367.6 -53051.7 70940.05 31281.08 45825.6 38688.4 29953.2 3627.23 13294.7 6202.51 6422.77 -930.96 6432.53 9559.37 4015.53 6842.66 2608.13 Change 56259.49 138419.3 -123992 39658.97 -14544.5 7137.2 8735.2 26325.97 -9667.47 6941.94 -220.26 7343.73 -7369.49 -3130.84 5554.34 -2877.63 4283.53 Percentage change 66% 261% -175% 127% -32% 18% 29% 726% -73% 111.92% -3.43% 789.91% -114.46% -31.71% 137.93% -41.79% 164.26% -

have invested from January, 1993 only. The net inflow has risen from Rs. 2608.13 crores in 1993 to Rs. 141627.1 crores in 2010 with relative ups and downs during the period as per the above table .during the period of 18 years there has been increase in in nine years while decline in the rest years It may be concluded that there are significant variations in the yearly inflow of FIIs

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 into the Indian capital market during 1993-2010. During the initial year 1992-93, the FII flows started in September 1992, which amounted to Rs. 13 crores because at this moment government was framing policy guidelines for FIIs. However, within a year, the FIIs rose to 39338 i.e. 46% of 1992-93 during 1993-94 because government had opened door for investment in India. Thereafter, the FII inflows witnessed a dip of 6.45%. However, the year 1995-1996 witnessed a turnaround, gliding up the contribution by FII to enormous amount of Rs. 6942 crores. Investments made by FIIs during 1996-1997 rose a little i.e. 23.52% of that of the preceding year. This period was ripe enough for FII Investments as that time the Indian economy posted strong fundamentals, stable exchange rate expectations and offered investment incentives and congenial climate for investment of these funds in India. During 1997-98, FII inflows posted a fall of 30.51%. This slack in investments by FIIs was primarily because of the S-East Asian Crisis and the months of volatility experienced during November 1997 and February 1998. The net investment flows by FIIs have always been positive from the year of their entry. However, only in the year 1998-99, an outflow nearly of Rs. 17699 crores was witnessed for the first time. This was primarily due to the economic sanctions imposed on India by Japan, US and other industrialized economies. These economic sanctions were the result of the testing of series of nuclear bombs by India in May 1998.FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in 2001-02 and 69.29 % in 2002-03. Investments by FII posted a fall of 80 % in 2002-03 as compared with investments in the period of 1999-00. Investments by FIIs rebounded from depressed levels from the year 2003-04 and witnessed an unprecedented surge. FIIs flows were recycled to India following readjustment of global portfolios of institutional investors, triggered by robust growth in Indian economy and attractive valuations in the Indian equity market as compared with other emerging market economies in Asia. The slowdown in 2004-05 was on account of global uncertainties caused by hardening of crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII inflows to India from August 2004 continued till end 2004-05. The inflows of FIIs during the year 2004-05 was Rs. 45881 crore. During 2006-07 the foreign institutional investors continued to invest large funds in Indian securities market. Strong FII flows had been a key characteristic of the period prior to December 2007. Graph 1- Sectoral investment by FIIs in India

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013

PETROLEUM 1% CEMENT 1% TELECOMUNICATI AUTO ON TEXTILE 7% POWER 3% 1% 0%

Sectoral Investment by FIIs

CONSUMER GOODS 49%

IT 22%

BANKS 11%

PHARMA 2% METALS ENGG 1% 2%

FMCG 0%

It can be seen from the diagram above that the major proportion of FII investments is into consumer goods and then followed by investments in the IT and the banking sector. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. The total number of FIIs in India has almost grown 99 times since the beginning they were allowed to enter the Indian equity markets TABLE 2- SEBI Registered FIIs in India

TABLE 3: SEBI Registered FIIs in India

Year 1992-93 1993-94 1994-95 1995-96

End of March 18 158 308 367

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 439 496 450 506 556 482 489 517 639 822 993 1219 1594 1648 Source : SEBI reports Graph 2- Trends of FII and Sensex

From the above chart it is evident that FIIs and sensex move in the same direction that is there exists a positive correlation between the BSE Sensex and FII fund flows. It can be observed that FIIs have significant influence on the sentiments and price trends in the Indian equity market as other market participants tend to follow their moves as they perceive the FIIs to be intelligent investors with deep assessment of the markets. Such herd mentality amplifies the role of the FIIs in the Indian stock market.

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Graph 3- FII Purchases, sales v/s Sensex
140000 120000 100000 80000 60000 40000 20000 0
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

DEATH OF LEHMAN BANK (Sept. 15/08)

Gross Purchase Gross Sales Adj Close (Sensex)

It can be seen from the above graph that with the advent of Sub- Crime crisis in US and its spill over effects, soon after the Sensex touched its record high of 1,20,000 points, the market soon tumbled with increase in FIIs sellings and a decrease in FII purchases thereby resulting in a decline in net FIIs. In FY 07-08, the net FII inflow in India amounted to $20.3 billion (at fund cost) and as compared to this they pulled out $11.1 billion (more than half of which they brought in 2007), of which $8.3 billion occurred over the 1st 6.5 months of FY 08-09. The pullout resulted in the fall of stock prices, as a result the sensex fell from its closing peak of 20,0873 on Jan 8,2008 to less than 10,000 by Oct 17,2008.FII holdings in PSUs is increasing because Overseas investors are increasingly reposing their faith and money in PSUs, with as many as nine public sector firms including Coal India, Power Grid Corp and NTPC, recording an increase in FII holdings over recent months. The trend of increased FII holdings in PSUs can be attributed to the strong balance sheet and long-term prospects of these entities. Also, most of the PSUs come out a lower price band for their initial stake sales than private sector companies and their operations are based on sound business practices, so the chances of facing corporate governance issues are very less. Its however, instructive to bear in mind that these national affiliations do not necessarily mean that the actual investor funds come from these particular countries. Given the significant financial flows among the industrial countries, national affiliations are very rough indicators of the home of the FII investments. In particular institutions operating from Luxembourg, Cayman Islands or Channel Islands, or even those based at Singapore or Hong Kong are likely to be investing funds largely on behalf of residents in other countries. Determinants of FII Flow in India

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 1.) Risk-Whenever risk in home market increases, the foreign investors would start to pull out of their home country thereby creating a deficiency of funds in domestic market, hence so as to attract investment domestic interest rate would increase thereby to ensure that the above equality is restored 2.) Inflation-At the time of high inflation, the real return on fixed income securities like bonds and fixed deposits declines. Thus a bond which gives say around 7.5% interest rate actually gives a real return of just 1% if the inflation is 6.5%. If the inflation increases further, the real return would decline more. 3) Interest rates -For the business, cost of borrowing rises this has a negative result on their profit margins. As a result they might even delay any investment activity which may be funded by borrowing to some later period when the interest rates are lower so as to reduce their investment costs. As it can be seen from the above table, over the past year RBI has increased the repo rate reverse repo rate, CRR and SLR. This has led to an increase in the Prime Lending Rate (PLR) and hence the general interest rate in the economy. 4)Good news /bad news -If say there is some bad news in the nation, which affects that is decreases the asset price, which in turn decreases the return and hence FII would withdraw from the market. However on the other hand, if there is good news, asset prices would increase; thereby increasing return and hence FII would be attracted. But the sensitivity with which investors withdraw is greater than with which they invest i.e. they would be more cautious while investing than at the time of withdrawing. This is primarily due to their basic nature of being risk averse, thus they would react more vigorously to bad news than to good news 5.)Equity Returns-The results show that, the equity return in India (RBSE) is the main driving force for foreign institutional investment, which is significant at all levels. That is increase in the returns in US stock market adversely affects the portfolio investment flowing to India. Predictable risk in foreign market (SDSRF) adversely affects FII flow to India and is highly significant in the model. 6)-GDP of India -Both have more or less direct relationship. The reason is change in capital account. When interest rates were high India was attracting lot of investments so the credit balance was high for that period. It kept on increasing form 2003-04 to 2007-08 and interest rates also kept on increasing from 2003-04 to 2007-08.besides there are various other factors like rules and regulation , taxasation , govt. policies etc.

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Impact of FII on economic indicators in India-FII flow affects the economy of country.

1. Balance of payment-A net positive swing in invisibles (due to increase in software exports and remittances sent by Indians working abroad) and increase in investments (both FDI and FII), has been improving the Balance of Payment (BOP) of the Indian economy and increasing the demand of rupee in the international currency market. In view of this the RBI had been following a policy of buying dollars (by selling rupee) in the international market, thereby avoiding an appreciation of rupee viz-a-viz the dollar.

2. Fluctuating Rupee-FIIs convert Dollars to Rupees to invest in Indian Markets- FII money comes in India at high Dollar rates. FII money would go out when Dollar dips to low values. Thereby the new noimnclature for this FII dollars let be SMART MONEY which finds more money. Well now see some major points on Sensex from 2003 with peaks of dollar as that could trigger money push into India ideallyJan -May 2003 - USD/INR roughly 47-48. Sensex moved from 3000 to 6000 and dollar dipped till 43 by May. Market corrected to 4200 after that. July - Sept 2005 - USD/INR 46 Sensex again moved from 5k to 12k and dollar dipped to 4443.5. Market corrected to 8800 after that. July - Sept 2006 - USD /INR 46 -47 Sensex moved from 9k to 21k and dollar dipped to 39. Market corrected to 13k. Maybe this is confusing but from the data it seems FII dollars starts entering into India when Dollar is quoting at a price of 45-47 or tops out and this money creates the next Bull Run. This withdrawal by the FIIs lead to a sharp depreciation of the rupee. Between January 1 and October 16, 2008, the RBI reference rate for the rupee fell by nearly 25 per cent, in relative to dollar, from Rs 39.20 to the dollar to Rs 48.86. This was despite the sale of dollars by the RBI, which was reflected in a decline of $25.8 billion in its foreign currency assets between the end of March 2008 and October 3, 2008. The result has been the observed sharp depreciation of the rupee. While this depreciation may be good for Indias exports that are adversely affected by the slowdown in global markets, it is not so good for those who have accumulated foreign exchange payment commitments. Nor does it assist the Governments effort to rein in inflation.

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 4.) Stock Market-Mathematicians and 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), theres 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.

Section VIII Data analysis Relationship between FII and Indian stock market Table -3 Correlations Net Purchase and return on stock Exchange

Correlations net_purchases_or_sales return_stock_exchange net_purchases_or_sales Pearson Correlation Sig. (2-tailed) N return_stock_exchange Pearson Correlation Sig. (2-tailed) N **. Correlation is significant at the 0.01 level (2-tailed). 120 .654** .000 120 120 1 .654** .000 120 1

The statistical test of Pearson correlation shows that there is a moderate degree of positive correlation between the net investments by FIIs and the sensex with R=.654(0<=R<.4) and that the correlation coefficient is very highly significantly different from zero (P < 0.001).

Table 4- Correlations

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013

net_purchases_or_sales adj_sensex_close net_purchases_or_sales Pearson Correlation Sig. (2-tailed) N adj_sensex_close Pearson Correlation Sig. (2-tailed) N **. Correlation is significant at the 0.01 level (2-tailed). The statistical test of Pearson correlation shows that there is a low degree of positive correlation between the net investments by FIIs and the sensex with R=.357(0<=R<.4) and that the correlation coefficient is very highly significantly different from zero (P < 0.001). 120 .357** .000 120 120 1 .357** .000 120 1

Model Summary Std. Error of the Model 1 R .354a R Square .297 Adjusted R Square .299 Estimate 671.26168

a. Predictors: (Constant), net_purchases_or_sales Table 5- Model Summary

R square, which is, also known as coefficient of determination tells us how much variance in outcome variable is explained by predictive variable.R2 = .297 which means 29.7)% of all the

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 variance in Sensex can be predicted or explained from the behaviour of FIIs which suggests that FIIs are not the only determining factors in deciding the movement/direction of Sensex, there are other major factors also, however FIIs as one of the factors cannot be completely ignored. But if they are so weakly correlated, then why do they grab the headlines?-This is because of perceived market behaviour .Be it any kind of a market, financial or real, the investor sentiments and psychology play a pivotal role. This is what something that just cant be captured in few numbers. According to various researches it has been concluded that frenzy and greed drive investors at the time of a bull run, and especially when a bull run is at its full momentum, investors usually tend to follow the band-wagon and overlook economic fundamentals while investing. In fact, stock market crashes too occur in somewhat similar fashion.. Table -6 Anova ANOVAb Model 1 Regression Residual Total Sum of Squares 3.981E7 5.317E7 9.298E7 Df 1 118 119 Mean Square 3.981E7 450592.239 F 88.350 Sig. .000a

a. Predictors: (Constant), net_purchases_or_sales b. Dependent Variable: Sensex

The Anova is just a way of testing whether our model is better than using just the mean to predict an outcome. It is statistically significant when the value is less than.05. As the value is less than .05, which suggests that, our model is a better predictor of the outcome. It is just a way of testing whether a model gives us anything more than just guessing each time the average value.

Table -7 Coefficients Coefficientsa

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Unstandardized Coefficients Model 1 (Constant) net_purchases_or_sales B -146.131 .083 Std. Error 68.161 .009 .654 Standardized Coefficients Beta T -2.144 9.399 Sig. .034 .000

a. Dependent Variable: return_stock_exchange Finally, T - test is important because it will explain whether the predictor is statistically significant, because it is less than .05 we can say that it is statistically significant. Now to fulfill the objective of this paper i.e. Influence of FII on movement of Indian stock exchange Bombay Stock Exchange of India) during the post liberalization period that is 1998 to 2010, the following research methodology is designed by applying a simple linear model to estimate the effect of FII on the stock index. The data analysis tools used in the research is correlation and regression. In this paper FII has been taken as independent factor and BSE as dependent factor Influence of FIIs on Indian stock market

1. Impact of FIIs on NIFTY: -The effect of FIIs on nifty is positive and co-efficient of correlation is .541 this shows that it has moderate degree of positive correlation; hence the effect is also moderate on nifty. The standard error is also low, that signifies that relation is true and there is less possibilities of deviation of result. Table -8-Regression Model Summary

Std. Error of the Model 1 R .541(a) R Square .293 Adjusted R Square .288 Estimate 7.09787

a Predictors: (Constant), fii

Table 9 Correlations

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Correlations

nsenifty Nsenifty Pearson Correlation Sig. (2-tailed) N Fii Pearson Correlation Sig. (2-tailed) N ** Correlation is significant at the 0.01 level (2-tailed). 1 . 143 .541(**) .000 143

Fii .541(**) .000 143 1 . 143

2. Impact of FIIs on BSE Sensex-The coefficient of correlation is .529, it signifies that the fiis has moderate degree of impact on sensex. Also the relation is positive in nature. Standard error is also low so there is less possibility of variation. Tabel 10-Correlations Correlations

BSESENSEX BSESENSEX Pearson Correlation Sig. (2-tailed) N FII Pearson Correlation Sig. (2-tailed) N * Correlation is significant at the 0.01 level (2-tailed). 1 . 143 .529(**) .000 143

FII .529(**) .000 143 1 . 143

Table 11-Regression Model Summary

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Adjusted R Model 1 R .529(a) R Square .280 Square .275 Std. Error of the Estimate 6.94629

a Predictors: (Constant), FII

3. Impact of FIIs on BSE CD: -FII has no significant relation with BSE CD, as the value of correlation is 0.066. This does not mean that there is no relation at all between them. It shows the absence of linear relation between the two variables but not a lack of relationship altogether. The degree of positive correlation between them is very low. Again the standard error is comparatively high, but it is acceptable. It is because the standard error in linear regression is usually high. Table 12-Correlations

BSECD BSECD Pearson Correlation Sig. (2-tailed) N FII Pearson Correlation Sig. (2-tailed) N 1 . 133 .066 .448 133

FII .066 .448 133 1 . 133

Table 13-Regression Model Summary

Adjusted R Model 1 R .066(a) R Square .004 Square -.003 Std. Error of the Estimate 92.88464

a Predictors: (Constant), FII

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 4. Impact of FIIs on BSE CG: BSE CG is positively correlated with FII for the period of January 1999 to February 2010.The value of correlation is 0.161. However degree of correlation is low. And standard error is also low. This shows that FIIs has less impact on consumer goods sector in comparison to other sector. Table 14-Correlations

FII FII Pearson Correlation 1 .

BSECG .161 .064

Sig. (2-tailed)

N BSECG Pearson Correlation

133 .161 .064

133 1 .

Sig. (2-tailed)

133

133

Table 15-Regression Model Summary

Adjusted R Model 1 R .161(a) R Square .026 Square .019 Std. Error of the Estimate 11.32273

a Predictors: (Constant), FII

5. Impact of FIIs on BSE FMCG: BSE FMCG is inversely related to FII for the period of January 1999 to September 2010. But the value of R is low so the degree of relation is low.

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Standard error in this case is 70.55 which is low. We can also say that FMCG sector has very low degree of negative correlation with FIIs.

Table 16-Correlations

FII FII Pearson Correlation Sig. (2-tailed) N BSEFMCG Pearson Correlation Sig. (2-tailed) N 1 . 133 -.001 .988 133

BSEFMCG -.001 .988 133 1 . 133

Table 17-Regression Model Summary

Adjusted R Model 1 R .001(a) R Square .000 Square -.008 Std. Error of the Estimate 70.55811

a Predictors: (Constant), FII

6. Impact of FIIs on BSE IT: There is no significant relation between IT sector and FIIs .It doesnt mean there is no relation between both them, but degree of relation is very low. Also the standard error is low, hence BSE IT has low degree of positive correlation for the period January 1999 to February 2010. Table 18-Correlations

FII FII Pearson Correlation 1 .

BSEIT .009 .919

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 Sig. (2-tailed) 133 .009 .919 133 1 .

N BSEIT Pearson Correlation Sig. (2-tailed)

133

133

Table 19-Regression Model Summary

Adjusted R Model 1 R .009(a) R Square .000 Square -.008 Std. Error of the Estimate 14.64555

a Predictors: (Constant), FII

Section IX Findings of the study1. BSE Sensex and Nifty has moderate degree of positive correlation with FIIs investment as a result their influence on the stock prices cannot be completely ignored. Hence both indices move in direction of FIIs investment. 2. BSE CD and BSE CG have low degree of positive correlation. It signifies that consumer durable and consumer goods sector are less dependent on FIIs. 3. BSE IT has low degree of negative correlation. It means that it doesnt rise with rise in FIIs.

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 4. FIIs has impact on improvement of market efficiency. As due to increasing investment of FIIs, SEBI and other regulatory bodies have to improve market trading efficiency in order to sustain FIIs investment and also to attract more investment. 5. Economic growth (IIP and GDP), inflation and interest rate are the key parameters on which FIIs invest in any countries. Also FIIs investments lead to economic growth of country since they bring in the much needed capital. 6. USA tops the list of being the largest source of FII flows to India. 7. With the help of trend analysis of FIIs it can be seen that they are now investing more in construction and banking sector. Also now they are moving more towards PSU sector 8. FIIs investment is now no-more concentrated on the top few companys, but they are now increasingly investing in medium share and low share companies also. Section X Conclusion &Recommendation-The study conducted observed that investments by FIIs and the movements of Sensex are quite closely correlated in India and FIIs wield significant influence on the movement of sensex. There is little doubt that FII inflows have significantly grown in importance over the last few years According to findings and results, I concluded that FII did have high significant impact on the Indian capital market. Therefore, the alternate hypothesis is accepted. FIIS have positive impact on BSE Sensex and Nifty. However there are other major factors that influence the bourses in the stock market, but FII is definitely one of the factors. This signifies that market rise with increase in FIIs and collapse when FIIs are withdrawn from the market. Also BSE CG, BSE CD, and BSE IT showed positive correlation but BSE FMCG showed negative correlation with FII. The degree of relation was low in all the case. It shows low degree of linear relation between FII and other stock index. This implies that their impact on the stock prices varies from sector to sector which is further influenced by the industry to which it belongs to and the sectoral performance. In the absence of any other substantial form of capital inflows, the potential ill effects of a reduction in the FII flows into the Indian economy can be severe which can be seen at the time of U.S subprime crisis. Data on trading activity of FIIs and domestic stock market turnover suggest that FIIs are becoming more important at the margin as an increasingly higher share of stock market turnover is accounted for by FII trading. Moreover, the findings of this study also indicate that Foreign Institutional Investors have emerged as

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 the most dominant investor group in the domestic stock market in India. Particularly, in the companies that constitute the Bombay Stock Market Sensitivity Index (Sensex), their level of control is very high. Data on shareholding pattern show that the FIIs are currently the most dominant non-promoter shareholder in most of the Sensex companies and they also control more tradable shares of Sensex companies than any other investor groups. RecommendationsA-For the Regulatory Authority

Portfolio capital flows are invariably short term and speculative and are often not related to economic fundamentals but rather to whims and fads prevalent in international financial markets. There are following policy implications, which emerge from this analysis. India should move to influence both the size and composition of capital flows. India should focus on strengthening their banking system rather than promoting financial markets. Banks can provide the surest vehicle for promoting long-term growth and industrialization. Since financial markets in India are here to stay, Government should try to shield the real economy from their vagaries. The new code has proposed to remove the current distinction between short-term investments and long-term investments on the basis of the length of holding of the assets. From an investors point of view, there is no incentive to stay long term. Government should set a minimum limit as well as maximum limit, within which FII invest in India , in order to avoid volatility in Indian stock market ( sensex & nifty) Government should allow more than 10% limit in LIC, Bank , Mutual Funds, Pension Fund & other small companies to invest in India Implementation of act is must & imperative in order to eschew from seasonal variation , Rules & regulation are made , but follow up is not there.

B. For the Retail Investors

Apart from the money that is brought in, FII investment is a testament of increasing global investor confidence in a particular economy and stock market.

GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 For a country like India this money brought in by the FIIs adds to the foreign reserves which can be used to import oil, machinery etc. With increased FII investment in a country and the increased confidence about the economy, FDI (Foreign Direct Investors) follow suit. How can one analyze FII investment in the stocks and benefit from it? While analyzing FII investment, one must check the following things: 1. Find out the % holding of FIIs in the stocks you have invested or plan to invest FIIs are not the cause of a growth of a company they come after the growth has actually started. So investing in a fundamentally strong company which has good future prospects too at a discounted price is the key investment mantra that you should follow. 2. Also, look for the no. of FIIs in a company. If the number is too large then its easier for the individual entities to move out of a stock which would make stock price of the company very volatile and risky. So, investing in a company which has smaller number of FIIs could be a safer investment option. FII is thus an important economic indicator which can help us analyze a particular stock and the whole stock market in a better manner. FIIs are beneficial for Indian economy and also our stock market.

Bibliography

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GYANPRATHA ACCMAN Journal of Management, Volume 5 Issue 1 2013 6. Trivedi and Nair (2005), Recent Volatility in Stock Markets in India and ForeignInstitutionalInvestors.2004, http://www.icrier.org/pdf/wp124.pdf
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Websites http://www.sebi.gov.in/ http://www.rbi.org.in/

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