Impact of Foreign Institutional Investors on the Stock Indices Abstract

Key Words: FII,

Introduction The present era is emerging as an era of transnational capitalism as huge international capital movements are taking place from developed economies to developing economies. In this regard, India has emerged as one of the hot destinations for Foreign Institutional Investors because of the growing growth story which still has to go a long way. The FII investment has become a dynamic source of capital to the emerging capital markets throughout the globe. However, it has brought in volatility concerns for the emerging capital markets, despite this, emerging economies are interested in attracting foreign capital as it helps in increasing the depth and breadth of the stock market and thereby increasing the liquidity of the stocks and the indices as well. It was September 1992 when the then finance minister, Manmohan Singh with suitable restrictions permitted the FII to invest in all the securities traded on the primary and secondary markets, including share, debentures and warrants issued by the companies which were listed or going to be listed on the stock market in India. Since then so many reforms have been undertaken to attract more and more FII investment to Indian capital market.

Review of Literature A lot of research has been focused on the impact of FII investment on the host countrys stock market so as to find the areas where the regulators are to be more vigilant. The review of some of the significant studies has been undertaken as under:

Need for the study Since the opening up of the Indias capital market in 1992, the FII activities have been on constant rise. The participation of FIIs enhances flows of equity capital and brings about financial innovation and development of hedging instruments. On the other hand, it is known as hot money for it is invested for short-term gains, therefore, it can have financial and economic repercussions on the countries and banks. Thus, it can be said that FII inflows is two-edged sword which needs be handled in a careful manner. It is against this background that the present study has been undertaken.

Objectives of the study The present study has been taken in view of the following objectives: To determine the level of impact that FII investment hold over the stock indices value. To determine the bi-directional relationship between FII inflows and Indices value.

Hypothesis of the study: Null Ho: There exists no relationship between FII net flows and stock index value. Alternate H1: There exists relationship between FII net flows and stock index value.