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A Comparative Study- Impact of FDI and FII in Indian Stock Market

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A Comparative Study- Impact of FDI and FII in Indian Stock Market International Journal of Research ISSN NO:2236-6124 A Comparative Study- Impact of FDI and FII in Indian Stock Market Aritra Ranjan Das Assistant Professor St. Xavier’s College (Autonomous), Kolkata [email protected] Abstract Foreign investments are seen as a source of capital formation in the country which transcends into economic growth of the country. Foreign investments in the form of FDI and FII coupled with exogenous factors like Exchange rates, global economic condition and endogenous factors like demand and supply, market capitalization, profitability etc exerts influence on the stock markets. The present paper makes an attempt to study the relationship and influence of FDI and FII on Indian stock markets. Sensex and Nifty are chosen as the representatives of Indian stock market. The result shows that FDI has significant influence on Indian stock market but FII has no such impact. Keywords: FDI, FII, Sensex and Nifty. Introduction In Emerging markets like India, Foreign Investments are seen as a tool for measuring the growth of economic globalization in the country. Being a developing economy India is always in need of funds and foreign investments act as an important medium through which such fund requirements are met. So the economic policies over the year have been liberalized to ensure an unhindered flow of foreign investments in the country from capital surplus nations. The capital rich nations are always in look for new markets having abundant labour and greater scope for the products for achieving high returns to fulfill their growing ambitions. The economic reforms of 1991 paved the way for growing importance of Foreign Investments in Indian economy. The collapse of Soviet Union, the major trading partner of India and increasing global oil prices due to gulf war resulted in an unfavorable balance of payment situation in the economy. The poor balance of payment situation compelled India to seek out a bailout loan of 1.8 billion US dollars from International Monetary Fund (IMF). IMF agreed to grant the loan but with the stipulated conditions to reform the Indian economy. Such economic reforms were popularly known as the Economic Liberalization of Indian Economy. The major thrust of such reforms was to remove red tape bindings, provide a congenial climate for greater private investment and integrate the Indian economy with global economy. All this reforms were brought under the aegis of Liberalization, Globalization and Privatization of Indian economy. The aim of such reform is to enable unrestricted flow of trade, technology and capital across national and state borders. The two routes of foreign investments are Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII). Volume VIII, Issue III, March/2019 Page No:1858 International Journal of Research ISSN NO:2236-6124 FDI refer to the capital flows from the world to the Indian economy to augment the production capacity whereas FII means the capital flows from the foreign investors or investment trust into the stocks traded in the secondary market in India to augment the capital availability. FDI flows are considered to be more stable and have greater relevance in any economy than FII as it not only increases the production capacity but also brings better management, superior technology, facilitates international trade and better governance practices. Though FII brings huge funds but such FIIs when exceeds limit brings volatility in the domestic market as it is short term and of speculative nature. The underlying profit motive in FIIs makes the capital unpredictable. This unpredictability brings unprecedented price fluctuations in the stock thereby leading to volatility in the market. So FII are commonly referred as hot money. Routes of FDI Automatic Route: It requires no prior approval from Government of India and Reserve Bank of India. In other words 100 percent FDI is allowed in these sectors. Government Route: Under this route prior approval of Government is required. The approval was obtained from Foreign Investment Promotion Board (FIPB) but from 24th May ,2017 FIPB was scrapped by Union Government and such approvals are handled by respective ministries in consultation with Department of Industrial Policy and Promotion, Ministry of Commerce. Routes of FII Equity Investment The 100 percent investment is related to equity instrument or can be done through70 percent (Equity Investment). 100 Percent Debt The 100 percent investment has to be made in the debt instruments only (Debt Investment). Relevance of FDI and FII in India Relevance of FDI and FII in India India, being a growing economy is always in need of fund to support the development of rudimentary infrastructure like Railways, Roadways, Ports, Logistics network, Electricity, Banking and Insurance Services etc. Moreover foreign fund is also required to fuel the expansion programs undertaken by various industries. This foreign fund not only increases the availability of funds but also reduces the cost of capital to the companies. Investors on the other hand reap the benefits of maximum return available from investment in growing economies like India. This win-win situation and gradual integration of domestic economy with global economy can lead to accelerated flows of foreign funds in form FDI and FII in India. Volume VIII, Issue III, March/2019 Page No:1859 International Journal of Research ISSN NO:2236-6124 Review of Literature Sultana and Pardhasaradhi [1] studied the pattern and flow of FDI and FII in India and its impact on Indian stock market for a period of eleven years from 2001 to 2011.The study concluded that both FDI and FII have considerable influence on the movement of stock markets and determines the trend of movements of stock market. Kapoor and Sachan [2] studied the flow of FDI and FII and its impact on Indian stock market from 2002 to 2011. The study revealed that FDI has no impact on Indian stock market but FII has significant impact on the Indian stock market and determines its movement. Aggarwal and Solomon [3] studied the flow of foreign capital flow in the form of FDI and FII and its impact on SENSEX and concluded that even though FDI enjoys strong correlation with SENSEX but both FDI and FII fails to determine the trends of stock movement of SENSEX. Das [4] made a study of the significance of FDI and FII in the economic growth of India. It was concluded that FDI has significant influence on the economic growth of the country but FII is insignificant to the economic growth of the country. Further the study revealed that Mauritius emerged as the top destination for FDI inflows in India and service sector emerged as the dominant sector where most of the FDI inflows taken place. Prasad and Vishali [5] studied the trading and shareholding pattern of FII in National Stock Exchange (NSE) of India. Further the relationship between FII and economic growth was focused upon. The trading pattern of FII showed that India emerged as a safe destination in the world for FII inflows during global recession. The shareholding pattern of FII showed that finance and banking sector accounted for more FII inflows. Lastly FII has no such impact on the economic growth of the country. Objectives of the Study i. To study the trends and pattern of flow of FDI and FII in India. ii. To study the relationship and impact of FDI and FII on Indian Stock market (SENSEX and NIFTY). Scope of the Study The present study covers a period of 10 years. To study the impact of FDI and FII on Indian Stock market BSE Sensex and CNX Nifty is considered as it is the most popular stock market indices in the country and is used by researchers and market participants for benchmarking. Research Methodology Data Collection Volume VIII, Issue III, March/2019 Page No:1860 International Journal of Research ISSN NO:2236-6124 Secondary data has been used in the study. The data related to FDI and FII are collected from the Bulletins of Reserve Bank of India and Ministry of Commerce, Govt. of India. Daily closing index value of BSE Sensex and CNX Nifty is obtained from the websites of bseindia and nseindia respectively. The daily closing index value is averaged to obtain the closing year end value of the indices. The present study is ranged from 2008 to 2018. Tools of Analysis The collected data is put through Karl Pearson’s coefficient of correlation and multiple regression to understand the relationship and impact of the FDI and FII on Indian stock market. Correlation coefficient is a statistical tool that measures the degree of association between two variables. The value of correlation coefficient lies between -1 to 1. Negative correlation coefficient shows inverse relationship and positive value represents positive relationship between the dependent and independent variable. Moreover the closeness of value to 1 represents the strength of relationship. In the present study correlation coefficient is employed to study the linear relationship between dependent variable (Sensex and Nifty) with independent variable (FDI and FII). Multiple Regression is a statistical method used to estimate the unknown values of dependent variable from the specified values of the independent variable. It is employed in the present paper to study the impact of FDI and FII on Sensex and Nifty. Two models are built to study the impact of FDI and FII on Indian stock market. Model 1 represents Sensex as dependent variable and FDI and FII as independent variable. Model 2 represents Nifty as dependent variable and FDI and FII as independent variable. The two models are represented as follows: BSE Sensex = a + b1 (FDI) + b2 (FII) CNX Nifty = a + b1 (FDI) + b2 (FII) Hypothesis The null hypothesis of the above models is as follows: Ho1: FDI has no impact on Sensex movements.
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