IMPACT OF FOREIGN INSTITUTIONAL INVESTORS ON INDIAN

STOCK MARKET- (1993 TO 2008)

[Abstract- This paper is to study the growth of foreign institutional

investors and their impact on Indian stock markets since India opened its
door to Foreign institutional investors on September 14, 1992 in order to
liberalise the foreign investment in India. The Foreign institutional
investors’ investment which is one of the determinants and which has both
positive and negative impact on Indian stock markets has been examined.
It also evaluates the impact of FII investment in terms of exchange rate of
Indian rupee. Since both BSE and NSE stock indices are based on FII
investment to a considerable extent, this paper studies the relationship
between FII investment and Indian stock indices. Besides, the investment
made by FII on Indian equity and debt markets has also been examined.]

INTRODUCTION

a. FII:

India opened its door to foreign institutional investors in September 1992 in order
to liberalize the financial market. Foreign investment refers to investments made by
the residents of a country in the financial assets and the production processes of other
country. FII flows form a part of foreign portfolio investment has a greater
importance in India and this resulted in effective globalisation in financial service
industries.

Foreign institutional investor is an investor mostly of the form of an institution or

entity, which invests in the financial markets of a country different from the one
where in the institution or entity was originally incorporated. FII investment is
usually referred to as HOT MONEY because it can leave the country at the same
speed at which it comes in.

1. Agencies regulating FII in INDIA:

➢ RBI : the apex bank
➢ SEBI : which regulates INDIA’s capital market
➢ FIPB : reviews all foreign investment proposals.
1. Entities eligible to invest:

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 ➢ As FII: Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio
manager, university funds, endowments, foundations, charitable trusts,
charitable societies, a trustee or power of attorney holder incorporated or
established outside India proposing to make proprietary investments or with
no single investor holding more than 10 per cent of the shares or units of the
fund.
➢ As Sub-accounts: The sub account is generally the underlying fund on
whose behalf the FII invests. The following entities are eligible to be
registered as sub-accounts, viz. partnership firms, private company, public
company, Institution or funds or portfolios established outside India,
whether incorporated or not, Proprietary fund of FII, Foreign Corporates,
Foreign Individuals.
1. FIIs registered with SEBI fall under two categories:
➢ Regular FIIs: those who are required to invest not less than 70 % of their
investment in equity-related instruments and 30 % in non-equity instruments.
➢ 100 % debt-fund FIIs: those who are permitted to invest only in debt
instruments.
1. Prohibitions on Investments:

Foreign Institutional Investors are not permitted to invest in equity issued by an Asset
Reconstruction Company. They are also not allowed to invest in any company which
is engaged or proposes to engage in the following activities:

➢ Business of chit fund

➢ Nidhi Company
➢ Agricultural or plantation activities
➢ Real estate business or construction of farm houses (real estate business does
not include development of townships, construction of residential or
commercial premises, roads or bridges).
➢ Trading in Transferable Development Rights (TDRs).

a. BSE SENSEX:

2
 Bombay Stock Exchange- Sensitive Index is a value-weighted stock market
index, which tracks the performance of the 30 largest stocks, whenever the market
has significantly changed enough to warrant the changes. The index typically
comprises about one fifth of the market capitalization of the entire stock exchange,
although the index only tracks a very small percentage of the total stocks traded on
the BSE.

The Bombay Stock Exchange is the oldest exchange in Asia. The BSE became
the first stock exchange to be recognized by the Indian Government under the
Securities Contracts Regulation Act in 1956.

The BSE Sensex was developed by Bombay Stock Exchange in 1986, giving the
BSE a means to measure overall performance of the exchange. Bombay Stock
Exchange switched to an electronic trading system in 1995.

b. NSE NIFTY:

In 1994, the National Stock Exchange was established in India to provide a more
transparent alternative to The Bombay Stock Exchange. The NSE is a national
exchange integrating the country's stock markets through nationwide automated on-
line screen operations and electronic clearing and settlement. The exchange's products
include equities, exchange-traded funds, stock futures, index futures, interest rate,
futures and options. The S&P CNX Nifty, a diversified 50-stock index representing
23 sectors of the Indian economy, is among the exchange's major indices.

In terms of daily trade numbers, the National Stock Exchange of India (NSE)
is India's largest securities exchange. NSE specializes in three market segments:
wholesale debt, capital market (automated screen-based trading system), and futures
and options (derivatives, the largest segment of the exchange).

LITERATURE REVIEW:

3
 Kishore C. Samal (1997)1 opined that in recent years, particularly in
developing countries like India, there had been increased liberalisation of domestic
financial and capital markets, and an opening up of the market to foreign institutional
investors. The main emerging feature of India's equity market was its steady
combination with the global market and its subsequent problems due to the hot
money movement by Foreign Institutional Investors (FIIs). Therefore, policy
measures to 'develop' equity market should aim to persuade small domestic investors
to participate in it and oppose the tendency of the FIIs to destabilise the promising
equity market.

Henry (2000)2 reports the two possible consequences of market liberalization

in the light of international asset pricing models. First outcome of market
liberalization is an increase in a country’s equity prices because market learns that
domestic markets will liberalize more in near future. The second impact of market
liberalization is on physical investment that will increase because of fall in cost of
capital as new entrepreneurs will initiate more investment projects. The second effect
of market liberalization will definitely increase the rate of economic growth.

Paul A. Gompers & Andrew Metrick (2001)3 analyses the demand for stock
characteristics and its implications on price and return by institutional investors. The
shares of the stock market were doubled by large investors in 1996 compared to 1980.
The demand for stock in large companies has increased where as decreased in small
companies due to compositional shift.

Chakrabarti (2001)4, made an empirical investigation to see the

interrelationship between FIIs flows and equity returns in India using monthly data.
He came with the evidence that the FIIs flows were highly correlated with equity
returns in India. He also found that FIIs flows are more likely to be the effect than the
cause of these returns, which contradicted the view that the FIIs determined market
returns in general.

Paramita Mukherjee, Suchismita Bose, & Dipaankor Coondoo (2002)5, says

that the performance of the emerging equity market is high compared to the matured
countries. The emerging market performs better in terms of both return and associated
risk whereas the matured countries have experienced drop in return and rise in risk.

4
 Batra (2003)6, using both daily and monthly data attempted to understand the
trading behaviour of FIIs and returns in Indian equity market. He found the strong
evidence of FIIs chasing trends and adopting positive feedback and herding trading
strategies. However, Batra did not find FIIs having any destabilizing impact on the
equity market.

Dahlquist et al. (2003)7, analysed foreign ownership and firm characteristics

for the Swedish market. They found that foreigners have greater presence in large
firms, firms paying low dividends and in firms with large cash holdings. They
explained that firm size was driven by liquidity. They measured international
presence by foreign listings and export sales. They reiterated that foreigners tend to
underweight the firms with a dominant owner.

Pushpa, Trivedi, and Abhilash nair (2003)8, suggested that the relationship
between the FII and the Indian economy remains debatable. Although FIIs had been
the net investors in the Indian capital market in the years except 1998, they had not
increased the risk- sharing ability of the market.

Sivakumar S (2003)9, examined that the net flows of foreign institutional

investment over the years, it also briefly analyses the nature of FII flows based on
research, explores some determinants of FII flows and examines if the overall
experience had been stabilising or destabilising for the Indian capital market.

Kulwant Rai & N. R. Banumurthy (2004)10 marked that FII inflows depends
on stock market returns, inflation rate, and ex- ante risk. In terms of magnitude, the
impact of stock market returns, and ex- ante risk turned out to be the major
determinants of FII inflows. Stabilising the stock market volatility and minimising the
ex- ante risk would help to attract more FII, an inflow of which has positive impact
on the real economy.

Dipankor, Coondoo and Paramita mukherjee (2004)11, analysed that the

moment of FII operations and other variables like stock market returns and the call
money rate were volatile. The over time movement of everyday activities of all the
variables contain affair amount of volatility. It’s also found that none of the variables
had been changed systematically over the time period and the strength of the

5
volatility of an individual FII variable was positively correlated with the stock market
returns and call money rate.

Michael Frenkel & Lukas menkhoff (2004)12, examined that the institutional
investors’ inflows were the most dynamic capital flows in the emerging market. But
the institutional investors do not automatically provide benefits for the emerging
markets.

Sandhya (2004)13, reported that unexpected flow from FIIs had a greater
impact on stock market than expected flow.

Douma, Pallathiatta and Kabir (2006)14, investigated the impact of foreign

institutional investment on the performance of emerging market firms and found that
there was positive effect of foreign ownership on firm performance. They also found
the impact of foreign investment on the business group affiliation of firms.

Rakshit (2006)15, criticised that, far from being healthy for the economy, FII
inflows had actually imposed certain burdens on the Indian economy. Understanding
the determinants and effects of FII flows and devising appropriate regulation
therefore constitute an important part of economic policy making in India.

Ila Patnaik (2008)16, reviewed that FII investors prefer highly liquefied firm
for investment. The median value of FII ownership in the first two quintiles 1 was
zero. If the liquidity of the firm increases, the FII shares in the firm also increases.

Prasanna. P. K (2008)17, found that more foreign investors prefer companies

which had high return and earnings per share are also high. FII prefer companies
which had higher volume of public shares and choose companies where family
shareholding of promoters was not substantial. The impact of FII in unexpected flows
was greater than in expected flows on stock market. Thus trading of FII had a great
impact on both the stock market and the stock price. This also influences the
company’s performance.

Bansal (2009)18, opined that when there was a decline in return after the entry
of FII in India, the volatility had been reduced. The volatility of Indian stock market

1 Quintiles refers to least liquefied firms.

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was not only because of FII inflow. There were also some other factors which
influence the volatility of Indian stock market.

During the post- crisis period, variance of the Indian markets does not emerge
as a decisive factor in explaining FIIs inflows to the Indian share market. This may be
due to the change in the attitude of FIIs as the result of Asian crisis. They do not seem
to look at Indian markets as an avenue to diversify their portfolio risk. Such
behaviour on the part of FIIs is also suggested by the lack of significance of the beta
of India share markets in driving the FII investment inflows to the Indian mar

II

FII TREND IN INDIA:

Portfolio investments in India include investments in American Depository

Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Institutional
Investments and investments in offshore funds. Before 1992, only Non-Resident
Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio
investments in India. Thereafter, the Indian stock markets were opened up for direct
participation by FIIs. They were allowed to invest in all the securities traded on the
primary and the secondary market including the equity and other
securities/instruments of companies listed to be listed on stock exchanges in India.

a. Number of FIIs registered with SEBI:

The following table represents the number of FIIs registered with SEBI from
1992 to 2009 yearly. From the below table it’s clear that the number of FIIs increases
year by year except for the years 1998- 1999, and 2001- 2002.

Table 1: Number of FIIs registered with SEBI- (1992-1993 to 2008-2009).

7
YEAR END OF MARCH END OF
DECEMBER
1992-93 0 -
1993-94 3 -

1994-95 156 -

1995-96 353 -

1996-97 439 -

1997-98 496 -

1998-99 450 -

1999-2000 506 -

2000-2001 527 -

2001-2002 490 -

2002-2003 502 517

2003-2004 540 637

2004-2005 685 823

2005-2006 882 993

2006-2007 997 1219

2007-2008 1319 1594

2008-2009 1626 1706

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 Source- www.sebi.org

The number of foreign institutional investors which was 3 in1993 increased to 1706
in the year 2009.

b. FII investment in India:

There may be many other factors on which a stock index may depend i.e.
Government policies, budgets, bullion market, inflation, economic and political
condition of the country, FDI, Re./Dollar exchange rate etc. The following table
revels the pattern of gross sales, gross purchase, and net investment during the
period 1993- 1994 to 2008- 200919.

Table 2: FII net investment

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Year Gross purchase Gross sales Net investment
Rs. In crores Rs. In crores Rs. In crores
1993-1994 5593 466 5126
1994-1995 7631 2835 4796
1995-1996 9694 2752 6942
1996-1997 15458 6974 8484
1997-1998 16679 11804 4876
1998-1999 16507.5 17935.9 -1428.5
1999-2000 57430.4 46846.3 10582.5
2000-2001 73269.3 64179.1 9511.5
2001-2002 50184.4 41453.7 8648
2002-2003 46772.1 44186 2822
2003-2004 148514.3 99547.1 48968.3
2004-2005 214524.1 171604.6 42920.3
2005-2006 347850.6 106697.7 41153.3
2006-2007 522417.8 489770.2 32647.8
2007-2008 947770.5 882699 65073.2
2008-2009 612406.5 658791.9 -46385.7
Source- Capital Market, CMIE (October 1998, & May 2009)20

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 The net investment made by FII in Indian market is volatile. Based on the
performance of the Indian market the net investment changes. During the year of
2007- 2008, the net investment was very high which reaches to RS. 65073.2 crores.
But on the consequent year i.e., 2008- 2009, and on 1997- 1998, the net investment
goes to negative (RS. -46385.7 crores). The gross purchase is lower than the gross
sales because of the economic crisis. FII crossed 65 thousand crores in the Indian
history of capital market in 2008 is the highest investment made by FII.

Fig 1: FII net investment.

c. Analysis:
1. Regression- Net investment, Number of FII, Exchange Rate, BSE, NSE:

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 Table 4: Regression- Net investment, Number of FII, Exchange Rate, BSE, NSE.
Adjusted R Std. Error of
Model R R Square Square the Estimate Durbin-Watson
1 .883a
.780 .701 14214.39490 1.194
a. Predictors: (Constant), NSE NIFTY, exchange rate, no. of FIIs, BSE
SENSEX
b. Dependent Variable: net investment
From the above table it is found that the r square value is 0.780, which means
the linear regression has 78% variation in the dependant variable. The Durbin Watson
statistical value is 1.194 which is less than du= 1.832 with a sample size taken n= 16,
and no. of predictors k= 4. So there exists positive autocorrelation.

Table 5: Coefficients
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) -67239.751 26430.123 -2.544 .027
no. of FIIs -71.481 15.129 -1.113 -4.725 .001
exchange rate 2155.203 737.093 .520 2.924 .014
BSE SENSEX 2.992 16.510 .556 .181 .860
NSE NIFTY 10.838 55.897 .600 .194 .850
a. Dependent Variable: net investment

Net investment= - 67239.751+ s10.838 X3+ 2.992 X2+ 2155.203 X4- 71.481 X1.
2. Regression- Net investment, Number of FII, Exchange Rate:

Table 6: Regression- Net investment, Number of FII, Exchange Rate.

Adjusted R Std. Error of
Model R R Square Square the Estimate Durbin-Watson
1 .510a .260 .146 24009.04228 1.677
a. Predictors: (Constant), exchange rate, no. of FIIs
b. Dependent Variable: net investment

2 Du obtained from the table “Critical Values of the Durbin Watson

statistics”.

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 From the above table it is found that the r square value is 0.260, which means
the linear regression has 26% variance in the data. The Durbin Watson statistical
value is 1.677 which is more than du= 1.54 with a sample size taken n= 16, and no. of
predictors k= 2. So there exists no positive autocorrelation.

Table 7: Coefficients
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) -72721.803 42053.243 -1.729 .107
no. of FIIs -15.561 17.627 -.242 -.883 .393
exchange rate 2417.131 1136.470 .584 2.127 .053
a. Dependent Variable: net investment
Net Investment= 2417.131 X4- 15.561 X1- 72721.803.

3. Regression- Net investment, BSE, NSE, Exchange Rate:

Table 8: Regression- Net investment, Exchange Rate, BSE, NSE.

Adjusted R Std. Error of
Model R R Square Square the Estimate Durbin-Watson
1 .579 a
.335 .169 23687.36100 1.370
a. Predictors: (Constant), exchange rate, BSE SENSEX, NSE NIFTY
b. Dependent Variable: net investment
From the above table it is found that the r square value is 0.335, which means the
linear regression has 33.5% variance in the data. The Durbin Watson statistical value
is 1.370 which is less than du= 1.68 with a sample size taken n= 16, and no. of
predictors k= 3. So there exists positive autocorrelation.

4. Unit root test for stability in BSE & NSE Indices:

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 Table 9: Coefficient- BSE
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) 2150.072 1506.511 1.427 .177
bse y .717 .195 .715 3.685 .003
a. Dependent Variable: bse xt
From the above table it is found that the b value is 0.717 which is less than 1.
So the BSE SENSEX index value is stable between the years 1993 to 2008.

From the below table it is found that the b value is 0.702 which is less than 1. So the NSE
NIFTY index value is stable between the years 1993 to 2008.

Table 10: Coefficient- NSE

Standardized
Unstandardized Coefficients Coefficients
B Std. Error Beta T Sig.
1 (Constant) 465.877 475.691 .979 .345
nse rt .702 .195 .706 3.596 .003
a. Dependent Variable: nse r

5. Granger test for Causality:

Null Hypothesis, N0: BSE and purchase has no cause over each other.
Alternate Hypothesis, NA: BSE and purchase has cause over each other.
Table 11: Causality for BSE and Purchase
Direction of causality F- value Decision
BSE to Purchase 208.341 Reject
Purchase to BSE 208.341 Reject
Direction of causality from BSE to FII purchase is that: estimated F value is
significance at 5% level; the critical F value is 4.60. In the same was direction of
causality between FII purchases to BSE. Thus proving Bilateral Causality. Both are
statistically significant different from zero significance. So they are bilateral
causality.

Null Hypothesis, N0: NSE and purchase has no cause over each other.
Alternate Hypothesis, NA: NSE and purchase has cause over each other.

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 Table 12: Causality for NSE and Purchase
Direction of causality F- value Decision
NSE to Purchase 239.112 Reject
Purchase to NSE 239.112 Reject

Direction of causality from NSE to FII purchase is that: estimated F value is

significance at 5% level; the critical F value is 4.60. In the same was direction of
causality between FII purchases to NSE. Thus proving Bilateral Causality. Both are
statistically significant different from zero significance. So they are bilateral
causality.

6. Granger test for Causality- 2 Lag:

Null Hypothesis, N0: BSE and purchase has no cause over each other.
Alternate Hypothesis, NA: BSE and purchase has cause over each other.

Table 13: Causality for BSE and Purchase (2 lag)

Direction of causality F- value Decision
BSE to Purchase 24.237 Reject
Purchase to BSE 14.159 Reject

Direction of causality from BSE to FII purchase is that: estimated F value is

significance at 5% level; the critical F value is 4.747. In the same was direction of
causality between FII purchases to BSE. Thus proving bilateral Causality. Both are
statistically significant different from zero significance. So they are bilateral
causality.

Null Hypothesis, N0: NSE and purchase has no cause over each other.
Alternate Hypothesis, NA: NSE and purchase has cause over each other.

Table 14: Causality for NSE and Purchase (2 lag)

Direction of causality F- value Decision
NSE to Purchase 29.379 Reject
Purchase to NSE 14.729 Reject

Direction of causality from NSE to FII purchase is that: estimated F value is

significance at 5% level; the critical F value is 4.747. In the same was direction of

15
causality between FII purchases to NSE. Thus proving bilateral Causality. Both are
statistically significant different from zero significance. So they are bilateral
causality.

7. Deterministic trend with Stationary AR (1):

Table 15: coefficients
Components B1 B2 B3
BSE 75.122 536.613 0.354
NSE 3.123 176.556 0.305

From the above table, in both the case of BSE and NSE indices, B1and B2 is
not equal to zero and B3< 1. There for, both BSE and NSE indices are stationary
around the deterministic trend.

III

FII EQUITY AND DEBT MARKET IN INDIAN STOCK MARKET:

a. FII in equity market:

The Indian Equity Market is more popularly known as the Indian Stock Market.
The Indian equity market has become the third biggest after China and Hong Kong in
the Asian region. According to the latest report by ADB, it has a market capitalization
of nearly $600 billion. As of March 2008, the market capitalization was around
$598.3 billion (Rs 30,13,000 crore) which is one-tenth of the combined valuation of
the Asia region. The market was slow since early 2007 and continued till the first
quarter of 2008.

Fig 2: FII Investment in Indian equity market.

1. Correlation for FII investment in equity market, exchange rate, and number
of FII:

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Null hypothesis, N0: Equity market has no impact on exchange rate, and number of
FIIs.

Hypothesis, N1: Equity market has impact on exchange rate, and number of FIIs.

Table 16: Correlation for FII investment in equity market, exchange rate, and number of
FII.

equity
market no. of FIIs exchange rate
equity market Pearson 1 -.203 .584
Correlation
Sig. (2-tailed) .550 .059
N 11 11 11
no. of FIIs Pearson -.203 1 -.158
Correlation
Sig. (2-tailed) .550 .642
N 11 11 11
exchange rate Pearson .584 -.158 1
Correlation
Sig. (2-tailed) .059 .642
N 11 11 11

From the above table it is clearly understood that

• The exchange rate is not influenced by the FII investment in equity market.
Since the significance level is 0.059 which is greater than 0.05.
• The significance level of correlation between FII investment in equity
market and the number of FII investors is 0.550 which is greater than 0.05. it
means that the number of FIIs registered with SEBI do not influence the FII
investment in Indian equity market.
So null hypothesis cannot be rejected.

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1. Correlation for FII investment in equity market, BSE SENSEX, and
NSE NIFTY:
Null hypothesis, N0: Equity market has no impact on BSE SENSEX and NSE
NIFTY.

Hypothesis, N1: Equity market has impact on BSE SENSEX and NSE NIFTY.

From the below table it is clearly understood that

• The significance level of correlation between equity market and BSE is 0.258
which is greater than 0.05. So the FII investment in equity market has no
influence over BSE SENSEX.
• Similarly, the significance level of correlation between equity market and
NSE is 0.250 which is greater than 0.05. So the FII investment in equity
market has no impact on NSE NIFTY.
So Null hypothesis cannot be rejected.

Table 17: Correlation for FII investment in equity market, BSE SENSEX,
and NSE NIFTY.
equity market BSE SENSEx NSE
equity market Pearson Correlation 1 .373 .379
Sig. (2-tailed) .258 .250
N 11 11 11
BSE SENSEx Pearson Correlation .373 1 .999**
Sig. (2-tailed) .258 .000
N 11 11 11
NSE Pearson Correlation .379 .999** 1
Sig. (2-tailed) .250 .000
N 11 11 11
**. Correlation is significant at the 0.01 level (2-tailed).

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1. Regression for FII investment in equity market, BSE SENSEX, and
NSE NIFTY:
Table 18: Durbin- Watson
Adjusted R Std. Error of
Model R R Square Square the Estimate Durbin-Watson
1 .396 a
.157 -.054 30063.30610 1.066
a. Predictors: (Constant), NSE, BSE SENSEx
a. Dependent Variable: equity market

From the above table it is found that the r square value is 0.157, which means
the linear regression has 15.7% variance in the data. The Durbin Watson statistical
value is 1.066 which is less than du= 1.54 with a sample size taken n= 11, and no. of
predictors k= 2. So there exists positive autocorrelation.

Table 19: Coefficient

Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -1276.312 18260.818 -.070 .946
BSE SENSEx -12.268 35.308 -2.248 -.347 .737
NSE 48.418 119.358 2.625 .406 .696
a. Dependent Variable: equity market

Equity market= 48.418 X3-12.268 X2- 1276.312.

b. FII in debt market:

Debt market refers to the financial market where investors buy and sell debt
securities, mostly in the form of bonds. Indian debt market is one of the largest in
Asia and is also considered a useful substitute to banking channels for finance.

1. Classification of Indian Debt Market:

Indian debt market can be classified into two categories:

19
Government Securities Market (G-Sec Market): It consists of central and state
government securities. It means that, loans are being taken by the central and state
government. It is also the most dominant category in the Indian debt market.

Bond Market: It consists of Financial Institutions bonds, Corporate bonds and

debentures and Public Sector Units bonds. These bonds are issued to meet financial
requirements at a fixed cost and hence remove uncertainty in financial costs.

Fig 3: FII in Debt market

2. Correlation for FII investment in debt market, exchange rate, BSE

SENSEX, and NSE NIFTY:
Null hypothesis, N0: Debt market has no impact on BSE SENSEX and NSE NIFTY,
exchange rate.

Alternate Hypothesis, NA: Debt market has impact on BSE SENSEX and NSE
NIFTY, exchange rate.

From the below table it is clearly understood that

• The significance level of correlation between debt market and BSE is 0.027
which is less than 0.05. So the FII investment in debt market has greater
influence over BSE SENSEX.
• Similarly, the significance level of correlation between debt market and NSE
is 0.030 which is less than 0.05. So the FII investment in debt market has
greater influence over NSE NIFTY.
• The significance level of correlation between debt market and exchange rate
is 0.488 which is less than 0.05. So the exchange rate does not have influence
over the Indian debt market.

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 Table 20: Correlation for FII investment in debt market, exchange rate, BSE SENSEX, and NSE
NIFTY.

debt market exchange rate NSE BSE SENSEx

debt market Pearson Correlation 1 .235 .660* .652*
Sig. (2-tailed) .488 .027 .030
N 11 11 11 11
exchange rate Pearson Correlation .235 1 .135 .111
Sig. (2-tailed) .488 .693 .745
N 11 11 11 11
NSE Pearson Correlation .660* .135 1 .999**
Sig. (2-tailed) .027 .693 .000
N 11 11 11 11
BSE SENSEx Pearson Correlation .652* .111 .999** 1
Sig. (2-tailed) .030 .745 .000
N 11 11 11 11

1. Regression for FII investment in debt market, exchange rate.

Table 21: Durbin- Watson

Model Summaryb

Adjusted R Std. Error of the

Model R R Square Square Estimate Durbin-Watson

1 .235a .055 -.050 5098.58013 1.772

a. Predictors: (Constant), exchange rate

b. Dependent Variable: debt market

From the above table it is found that the r square value is 0.05, which means
the linear regression has 5.5% variance in the data. The Durbin Watson statistical

21
value is 1.772 which is more than du= 1.36 with a sample size taken n= 11, and no. of
predictors k= 1. So there exists no positive autocorrelation.

Table 22: Coefficient

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta T Sig.

1 (Constant) -13957.692 21908.887 -.637 .540

exchange rate 359.012 496.077 .235 .724 .488

a. Dependent Variable: debt market

Debt market= - 13957.692+ 359.012X4

IV

FII and EXCHANGE RATE:

Rate at which one currency may be converted into another. The exchange rate
is used when simply converting one currency to another, or for engaging in
speculation or trading in the foreign exchange rate

Fig 4: Exchange rate.

There are a wide variety of factors which influence the exchange rate, such as
interest rates, inflation, and the state of politics and the economy in each country.
Also called rate of exchange or foreign exchange rate or currency exchange rate.

a. Correlation for exchange rate, FII net investment, and number of FII:

Null hypothesis, N0: Exchange rate has no impact on FII net investment.

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Alternate Hypothesis, NA: Exchange rate has impact on FII net investment.

Table 23: Correlation for exchange rate, FII net investment, and number of FII.

net investment
exchange rate no. of FIIs in dollars
exchange rate Pearson Correlation 1 -.158 .593
Sig. (2-tailed) .642 .055
N 11 11 11
no. of FIIs Pearson Correlation -.158 1 -.132
Sig. (2-tailed) .642 .699
N 11 11 11
net investment in dollars Pearson Correlation .593 -.132 1
Sig. (2-tailed) .055 .699
N 11 11 11

From the above table it is clearly understood that

• The change in exchange rate has no impact on FII net investment. Since the
significance level is 0.055 which is greater than 0.05.
• Similarly the exchange rate also has no influence on number of FII investors
with a significance level of 0.642 which is greater than 0.05.
So null hypothesis cannot be rejected.

FII AND GOVERNMENT POLICIES:

23
 There are certain limitations applied to investments by FIIs into India. FIIs’ and
their sub- accounts’ investment in an Indian company cannot exceed ten percent
(10%) of the total issued share capital of the Indian company (five percent if the sub
account is a foreign corporation or individual). In addition, the aggregate investment
of all FIIs in an Indian company may not exceed twenty four percent (24%) of its
total issued share capital, without the express approval of its board of directors and
shareholders. Even with board of director and shareholder approval, the same sectoral
limits which apply to foreign direct investment would continue to apply. FIIs may
register with SEBI as a debt fund or an equity fund. FIIs which are registered as
equity funds are required to invest at least seventy percent (70%) of their funds in
equity and equity-related securities. A FII registered as a debt fund, on the other hand,
must invest one hundred percent (100%) of its funds in debt instruments. Foreign
corporations and individuals are not eligible sub accounts of a FII that is registered as
a debt fund. FIIs are not permitted to engage in short selling, other than in respect of
derivative securities traded over a recognized exchange, and must effect transactions
through a registered stock broker. Sector investment prohibitions and caps which
apply to foreign direct investment also apply to investments by FIIs, and FII
investments must also meet the terms with the pricing requirements applicable to
foreign direct investment. In addition, FIIs are not permitted to invest in print media.

VI

CONCLUSION

To conclude, from the above study, the investments made by Foreign

institutional investors do not impact much on both the Indian stock markets BSE
SENSEX and NSE NIFTY during the period under study. The investment made by
FII in Indian equity market is not influenced by number of FIIs registered with SEBI
and the exchange rate. The investment made by FII in Indian debt market does not
influence the net investment made by FII in Indian stock market and the number of
FIIs registered with SEBI. The investment made by FII in Indian debt market does
not influence on exchange rate whereas, it influences both the indices BSE and NSE.

24
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