Impact of FIIs on Indian

Stock Market
Prepared to present in the BIMS National Conference
2016
By
Harish S N
Research scholar
UGC- Senior research scholar
Dept. Business Administration
Mangalore University
Karnataka

Introduction
STOCK MARKET
A public market for the trading of company stock and
derivatives at an agreed price.
A place where people can buy and sell portions of
businesses called stocks.
The stocks are listed and traded on stock exchanges
which are entities of a corporation or mutual
organization.
Though a number of other exchanges exist, NSE and
BSE are the two most significant stock exchanges in
India.

FIIs
Institutional Investor is any investor that is
registered in a country or outside of the one
in which it is currently investing.
The term Foreign Institutional Investors
refers to outside investors investing in the
financial markets of India.
There are 1484 FIIs and 38 foreign brokers
registered to Securities & Exchange Board
of India.

How FII started in India?

India opened its stock market to foreign
investors in September 1992.
since 1993, received portfolio investment
from foreigners in the form FII in equities
In order to trade in Indian equity market
foreign corporation need to register with SEBI
as FII and shall comply with the Exchange
Control Regulations of RBI.

Literature Review
We have reviewed several studies on FIIs and its
impact on Indian stock market.
For instance,
Rao (1999)
Chakrabarthi (2001)
Chaitanya (2003)
Kulwantraj and Bindu (2004), Batra
(2004)
Pal (2005)
Douma, Pallathiatta and Kabir (2006)
and reviewed many more.

Literature Review findings

A few research studies are favor and
argued that FIIs are positively impact
on Indian stock market.
On contrary, several research studies
are proved that FIIs are adversely
impacts the Indian stock market.
Therefore, this study analyses the
impact of FIIs on Indian stock market.

Why there is need of FII ?

FII flows supplements and augmented
domestic savings and domestic investment
without increasing the foreign debt of our
country
Capital inflows to the equity market
increase stock prices, lower the cost of
equity capital and encourage the
investment by Indian firms
The expert group opines that FII inflows
have some savings like features

How they perform

The degree of volatility can be attributed to the
following reasons:
The increase in investment by FIIs increases stock
indices the stock prices and encourages further
investment . In this event when any correction takes
place the stock prices decline and there will be pull
out by the FIIs in a large numbers as earning per
share declines
The FIIs manipulate the situation of boom in such a
manner that they wait till the index rises up to a
certain height and exit at an appropriate time. This
tendency increases the volatility further

Impact of FIIs on Indian Stock Market

FIIs Investments.
Appreciation of the rupee :
Higher forex reserves .
Creating wealth .
Direct effect on Inflation.

Impact of FIIs on Indian Stock Market

Appreciation of the Rupee: Taking a closer
look at the funds flow, FIIs bring dollars to
India which get converted into rupees in
the inter-bank foreign exchange market.
As the supply of dollars increase, the law
of demand-supply starts operating and
the rupee appreciates vis--vis the dollar .
Higher forex reserves :So, higher foreign
(dollar) inflows into India usually translate
into more rupee liquidity in the system.
This increases the money supply and
facilitates easy availability of credit
(loans) from banks

Impact of FIIs on Indian Stock Market

Creating wealth: FII flows also aid in lowering the
cost of borrowings. The easy availability of credit and
the lower borrowing costs increase consumption
demand for housing, durables, cars and real-estate.
This higher demand often leads to greater public and
corporate investments, resulting in higher economic
growth .
Direct effect on Inflation :This positive wealth effect
also often leads to higher consumption and greater
demand for other asset classes such as gold, realestate etc., which, in turn, fuels economic growth and
inflation. Higher FII flows can, thus, be seen to help
create wealth through higher asset prices

Impact Of FIIs On Indian

Markets
In the past four years there has been more than
$41 trillion worth of FII funds invested in India.
The present downfall of the market too is
influenced as these FIIs are taking out some of
their invested money.
For long-term value investors, theres little
because for worry but short term traders are
adversely getting affected by the role of FIIs are
playing at the present.

Why FII called good friend for

good time volatile in nature
In the Indian stock markets movement of the
stock depends on the limited no of stocks
As FIIs purchase and sell these stocks there
is a high degree of volatility in the stock
market
If any set of development encourages
outflow of capital that will increase the
vulnerability of the situation in the stock
market
In India there have been five such incidents
in the recent past

FII flows in India.

INR crores

Financial
Year
1993-94
1994-95
1995-96
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

Equity

Debt

Total
5,127
4,796
6,942
8,575
5,958
-1,584
10,122
9,933
8,763
2,689
45,765
45,881
41,467
30,840
66,179
-45,811

Change in
equity
-331
2,146
1,604
-3,279
-5,984
10,387
537
-2,135
-5,545
37,433
4,163
4,678
-23,565
28,168
-1,01,110

% Change in
equity
-6.45602
44.74562
23.10573
-38.3688
-113.613
1448.68
5.553257
-20.917
-68.6943
1481.322
10.41792
10.60218
-48.2879
111.6183
-189.33

5,127
4,796
6,942
8,546
5,267
-717
9,670
10,207
8,072
2,527
39,960
44,123
48,801
25,236
53,404
-47,706

0
0
0
29
691
-867
453
-273
690
162
5,805
1,759
-7,334
5,605
12,775
1,895

2009-10

1,10,221

32,438

1,42,658

1,57,927

-331.042

2010-11

1,10,121

36,317

1,46,438

-100

-0.09073

2011-12

43,738

49,988

93,726

-66,383

-60.2819

2012-13

1,40,033

28,334

1,68,367

96,295

220.1632

FIIs as major cause of market crash

( Jan 21 to Jan 29 2008)
The Indian capital markets have been left
reeling under the impact of liquidity crunch
caused by multiple factors
It began with two mega issues of reliance
power and future capital holdings, which
drew out huge amounts of money from the
market
FIIs bowed out from the capital market
with more than Rs 10000 crore

 In the past four years there has been more than

$41 trillion worth of FII funds invested in India.
This has been one of the major reasons on the bull
market witnessing unprecedented growth with the
BSE Sensex rising 221% in absolute terms in this
span
Though there is a lot of value in this market and
fundamentally there is a lot of upside in it. For
long-term value investors, theres little because
for worry but short term traders are adversely
getting affected by the role of FIIs are playing at
the present

The FII flow in India from

2000-01 to 2013-14.

The NSE Nifty Index

movements

The above figures show that the movement of FII and NSE
nifty indices are highly depends on each other. The FIIs helps for
liquidity in the equity market and boost the confidence in the
market. It can be observed that FIIs have significant influence on the
sentiments and price trends in the Indian equity market investors.
Habitually, domestic investors tend to follow FIIs 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. Thus the emerging market like India gets
benefits from the FIIs. However the natures and objectives of FIIs
are not to promote the Indian capital market and economy. FIIs have
their own interest and strategies to operate in the equity market. The
past empirical studies and evidence that they prefers fast exist in the
adverse conditions and FIIs helps to create the panic movements in
the market.

Conclusion
Our study reveals that NSE Nifty has moderate
level of relationship with FIIs investment.
NSE nifty index moves in direction of FIIs
investment and FIIs huge amount on flow can
change the prices of stocks.
Emerging market required the FIIs for efficient
flow of capital and to extend the liquidity.
The SEBI has taken imitativeness to increase
the FIIS and to attract more FIIs to the Indian
market to improve the price efficiency and
liquidity of the capital markets.

Thank you