RESEARCH PROJECT
ON
IMPACT OF FII ON
CAPITAL MARKET
(An Empirical Study On Indian Capital Markets)
INTRODUCTION
This research project studies the relationship between FIIs investment and
stock indices. For this purpose I selected India’s two major indices i.e.
Sensex and S&P CNX Nifty. These two indices, in a way, represent the
picture of India’s stock markets. I also selected the five industry specific
indices of BSE i.e. BSE CD, BSE CG, BSE FMCG, BSE HC and BSE IT
so as to further observe the effect of FII on particular industry. So this
project reveals the impact of FII on the Indian capital market.
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. But for
my study I have selected only one independent variable i.e. FII. This study
uses the concept of correlation and regression to study the relationship
between FII and stock index. The FII started investing in Indian capital
market from September 1992when the Indian economy was opened up in
the same year. Their investments include equity only. The sample data of
FIIs investments consists of monthly average from January 1993 to
September 2001 with 105 observations.
Objective: The objective of my research is to find the relationship between
the FIIs investment and stock index. I have also analyzed the impact of FII
on specific industrial sector indices.
Null Hypothesis (Ho): The various BSE indices and S&P CNX Nifty index
does not rises with the increase in FIIs investment.
Hypothesis (H): The various BSE indices and S&P CNX Nifty index rises
with the increase in FIIs investment.
RESEARCH DESIGN
Hypothesis: The various indices of BSE and NSE Nifty rises with the
increase in FIIs investment.
What to observe?
For my research purpose I selected six indices of BSE i.e. Sensex, BSE CD,
BSE CG, BSE FMCG, BSE HC and BSE IT and one index of NSE i.e. S&P
CNX Nifty. The sample data of FIIs investments consists of the monthly
average from January 1993 to September 2001 with 105 observations. The
sample data of Nifty and Sensex consists of the monthly closing index
January 1993 to September 2001 with 105 observations while the past three
years data has been taken for other BSE indices with 33 observations in
each case.
How to observe?
The data regarding indices of BSE was taken from the site of BSE and BSE
yearbook 2001. I got the data on FIIs investment from Reserve Bank of
India’s site. The data of NSE Nifty index was obtained from the site of
national stock exchange. Other financial sites, newspapers and magazines
helped me in collecting the required data.
How to record observation?
I have taken the monthly closing index of all the indices. For FIIs I have
recorded monthly average of the net investments made by them in the
Indian capital market.
Net Investments = Purchases – Sales
Model: A simple linear relationship has been shown between two variables
using correlation and regression as the data analysis tools. One variable is
dependent and the other is independent. I have taken FII as the independent
variable while the stock index has been taken as dependent variable. The
impact of FII has been separately analyzed with each of the index. So,
correlation and regression has been separately run between FII and seven
indices taking one index at a time.
Inference: If the hypothesis holds good then we can infer that FIIs have
significant impact on the Indian capital market. This will help the investors
to decide on their investments in stocks and shares. If the hypothesis is
rejected, or in other words if the null hypothesis is accepted, then FIIs will
have no significant impact on the Indian bourses.
LITERATURE REVIEW
5.On the dynamic relation between stock prices and exchange rates - by
Richard A.Ajayi and Mbodja Mougou (Wayne State University)
In this study they imply recent advances in the time-series analysis to
examine the inter-temporal relation between stock indices and exchange
rates for a sample of eight advanced economies. An error correction model
(ECM) of two variables employed to simultaneously estimate short-run and
long-run dynamics of variables. The ECM result revealed significant short-
run and long-run relationship between two financial markets. Specifically,
the results show that increase in aggregate stock prices has negative short-
run effect on domestic currency value. In the long-run, however, stock
prices have positive effect on domestic currency value. On the other hand
currency depreciation has negative short-run and long-run effects on stock
market.
RESEARCH METHODOLOGY
Models:
Regression Analysis: This analysis tool performs linear regression analysis
by using the "least squares" method to fit a line through a set of
observations. We can analyze how a single dependent variable is affected
by the values of one or more independent variables — for example, how an
athlete's performance is affected by such factors as age, height, and weight.
We can apportion shares in the performance measure to each of these three
factors, based on a set of performance data, and then use the results to
predict the performance of a new, untested athlete.
Correlation: This analysis tool and its formulas measure the relationship
between two data sets that are scaled to be independent of the unit of
measurement. The population correlation calculation returns the covariance
of two data sets divided by the product of their standard deviations. We can
use the Correlation tool to determine whether two ranges of data move
together — that is, whether large values of one set are associated with large
values of the other (positive correlation), whether small values of one set
are associated with large values of the other (negative correlation), or
whether values in both sets are unrelated (correlation near zero).
Data: The sample data consists of 105 observations for FII, Sensex and
S&P CNX Nifty starting from January 1993 to September 2001. The sample
for other five indices of BSE consists of 33 observations starting from
January 1999 to September 2001. I have taken the monthly closing index of
all the indices and monthly average of net investments made by FII. 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 Health Care (HC) – 48
BSE Information Technology (IT) – 42
FII was taken as independent variable. Stock indices were taken as
dependent variable. The data was taken from various financial sites.
FINDINGS
The findings for the data sample after applying correlation and regression:
RESULTS
1. Impact of FII on Nifty: The effect of FII on Nifty is positive. But the co-
efficient of correlation is low so the effect is less. The standard error comes
out to be 221.1which is high. This does not mean the relation is false but we
can say that the error in linear relation is high.
2. Impact of FII on BSE Sensex: The effect of FII on Sensex is negative.
So, FII is inversely related to Sensex. But the co-efficient of correlation is
very low so the effect is very less. The standard error comes out to be
319578.2which is very high. This means that the deviation from the mean
value is high. This does not mean the relation is false but we can say that
the error in linear relation is high. The value of multiple-R is also very less.
We can say that FII did not have any significant impact on Sensex during
the period of January 1993 to September 2001.
3. Impact of FII on BSE CD: BSE CD is inversely related to FII for the
period of January 1999 to September 2001. But the extent of impact is very-
very low as co-efficient of correlation is -0.011.
4. Impact of FII on BSE HC: FII has no significant relation with BSE HC,
as the value of correlation is 0.003. 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.
5. Impact of FII on BSE FMCG: BSE FMCG is inversely related to FII for
the period of January 1999 to September 2001. But the value of R is low so
the degree of relation is low. Standard error in this case is 130.6which is
less compared to other standard errors between FII and other stock indices.
6. Impact of FII on BSE CG: BSE CG is also negatively correlated with
FII. In this case again the degree of relation is less.
7. Impact of FII on BSE IT: BSE IT is positively correlated with FII for the
period of January 1999 to September 2001.The value of correlation is 0.236.
CONCLUSION
According to findings and results, I concluded that FII did not have
any significant impact on the Indian capital market. Therefore, the null
hypothesis is accepted. BSE IT and Nifty showed some positive correlation
but rest of the index showed negative correlation with FII. Also the degree
of relation was less in all the case. It shows the absence of linear relation
between FII and stock index. This does not mean that there is no
relationship between them.
One of the reasons for absence of any linear relation can also be due
to the sample data. The data was taken on monthly basis. The data on daily
basis can give more positive results (may be). Also FII is not the only factor
affecting the stock indices. There are other major factors that influence the
bourses in the stock market. I also analyzed that FII had significant impact
on the stock index for the period starting from January 1997 to December
1999. This shows that FII did not had any significant impact earlier but later
on they played an important role in the stock market. The sample data
available for sectoral indices was low with just 33 observations that have
also hampered the results.
BIBLIOGRAPHY
• www.bseindia.com
• www.nseindia.com
• www.rbi.org.in
• www.equitymaster.com
• www.etintelligence.com
• Journal of Financial Research
• Journal of Management Research FMS, Delhi
• Vikalpa IIM, Ahmedabad
• ICFAI Reader ICFAI, Hyderabad
• Basic Econometrics by Damodar Gujrati
• Fundamentals of Mathematical Statistics by S.C.Gupta