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).

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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.

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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

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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. Ha1: FDI has impact on Sensex movements. Ho2: FII has no impact on Sensex movements. Ha2: FII has impact on Sensex movements.

Ho3: FDI has no impact on Nifty movements. Ha3: FDI has impact on Nifty movements. Ho4: FII has no impact on Nifty movements. Ha4: FII has impact on Nifty movements.

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Analysis:

Table I:Trends of FDI and FII in India (in US$ Million)

Year FDI(Foreign Direct Growth in FDI FII(Foreign Growth in FII Investments) Flows Flows Institutional flows (in percentage) Investments) Flows (in percentage) 2007- 08 34843 20328 2008-09 41873 20 -15017 -174 2009-10 37745 -10 29048 293 2010-11 34847 -8 29422 1 2011-12 46556 34 16812 -43 2012-13 34298 -26 27582 64 2013-14 36046 5 5009 -82 2014-15 45148 25 40923 717 2015-16 55559 23 -4016 -110 2016-17 60220 8 7735 293 2017-18 61963 3 22165 187 Source: FDI and FII from DIPP website

Graph I: Trends of FDI and FII 70000

60000

50000

40000

30000 FDI Inflows

20000 FII Inflows

10000

0 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 -10000

-20000

Interpretation:

Table I and Graph I represents the flow of FDI and FII in US$ million. The flow of FDI has been increasing from 2013-14 and stood at US$ 61963 million in 2017-18. The annual growth in the FDI has been declining since 2015-16 and in 2017-18 FDI in India has registered the slowest

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growth rate of mere 3 percent. In respect of FII a mixed trend is visible with abrupt increase and falls as FIIs are highly volatile. FII stood at US$ 22165 million in 2017-18 and increased by 187 percent over previous year. The year 2014-15 saw the highest growth in FII both in absolute and percentage terms of US$ 40923 million and 717 percent respectively. The year 2008-09 and 2015-16 had negative FII flows of US$ 15017 million and US$ 4016 million respectively. From a comparative viewpoint FII has always remained far below FDI except in the year 2014-15 when FDI and FII registered above US$ 40000 million.

A. Correlation between FDI and FII and Sensex and Nifty

Table II: Correlation Coefficient FDI FII

** SENSEX Pearson Correlation .799 .167 Sig. (2-tailed) .003 .623

N 11 11

NIFTY Pearson Correlation .813** .153 Sig. (2-tailed) .002 .653

N 11 11

**. Correlation is significant at the 0.01 level (2-tailed). The correlation coefficient computed between FDI & Sensex and FDI & Nifty indicates strong positive correlation and it is significant at p<0.01. However FII & Sensex and FII & Nifty enjoys a positive relationship but it is not at all significant.

B. Impact of flows of FDI and FII on Sensex

Table III: Model Summaryb Change Statistics Durbin-Watson R Adjuste Std. Error R F Mode Squar d R of the Square Chang Sig. F l R e Square Estimate Change e df1 df2 Change 1 .884 3222.6601 .781 .727 .781 14.289 2 8 .002 1.661 a 0 Predictors: (Constant), FDI and FII Dependent Variable: Sensex

The multiple correlation coefficient computed between FDI, FII and Sensex indicates a strong positive relationship as value of R=0.884.Thus it shows that there exists a strong positive linear

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relationship between observed values and model predicted values of dependent variable. R square , the coefficient of determination shows that 78.1 percent of the variation in dependent variable Sensex is explained by FDI and FII . The Durbin- Watson statistic is calculated to see whether the errors or residuals are statistically independent or in other words not autocorrelated. The value closer to 2 indicates that residuals are uncorrelated and for the selected data the value is 1.661 which indicates that residuals are independent.

Table IV: ANOVAb Sum of Model Squares df Mean Square F Sig. 1 Regression 2.968E8 2 1.484E8 14.289 .002a Residual 8.308E7 8 1.039E7 Total 3.799E8 10 a. Predictors: (Constant), FII, FDI b. Dependent Variable: SENSEX

ANOVA or Analysis of variance is employed to make a more formal conclusion about the goodness of fit of the model. The ANOVA table shows the F-statistic at 14.289 with p-value of less than 1percent. So it can be concluded that with more than 99 percent level of confidence that the regression model better predicts the variation in Sensex.

Table V: Coefficientsa Unstandardized Standardized Coefficients Coefficients Collinearity Statistics Model B Std. Error Beta t Sig. Tolerance VIF 1 (Constant) -4831.624 4937.875 -.978 .356 FDI .528 .101 .896 5.249 .001 .938 1.066 FII .146 .064 .390 2.287 .052 .938 1.066 a. Dependent Variable: SENSEX Table V represents the coefficients and the Collinearity statistics of the data used for the study. The collinearity statistics (the linear relationship between the independent variable) is represented by Variance Inflation Factor (VIF) and Tolerance statistic. Value of VIF above 10 and value of Tolerance statistic below 0.2 indicates high degree of association between independent variables, which is a potential problem for multiple regressions. The regression model in the study is appropriate as VIF is 1.066 and Tolerance statistic is 0.938.

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Further Table V shows that FDI has impact on Sensex movements as p<0.01, hence null hypothesis Ho1 is rejected. However FII has no impact on Sensex movements as p> 0.05, hence null hypothesis Ho2 is accepted. C. Impact of flows of FDI and FII on Nifty

Table VI: Model Summaryb

Std. Change Statistics R Error of R F Mo Squar Adjusted the Square Chang Sig. F del R e R Square Estimate Change e df1 df2 Change Durbin-Watson 1 979.719 .892a .796 .745 .796 15.570 2 8 .002 1.729 60 a. Predictors: (Constant), FII, FDI b. Dependent Variable: NIFTY The multiple correlation coefficient computed between FDI, FII and NIfty indicates a strong positive relationship as value of R=0.892.Thus it shows that there exists a strong positive linear relationship between observed values and model predicted values of dependent variable. R square , the coefficient of determination shows that 79.6 percent of the variation in dependent variable Nifty is explained by FDI and FII . The Durbin- Watson statistic is calculated at 1.729 which shows the assumption of independent residuals is tenable.

Table VII: ANOVAb Sum of Model Squares df Mean Square F Sig. 1 Regression 2.989E7 2 1.494E7 15.570 .002a Residual 7678803.912 8 959850.489 Total 3.757E7 10 a. Predictors: (Constant), FII, FDI b. Dependent Variable: NIFTY

The ANOVA table shows the F-statistic at 15.570 with p-value of less than 1percent. So it can be concluded that with more than 99 percent level of confidence that the regression model better predicts the variation in Nifty.

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Coefficientsa Unstandardized Standardized Coefficients Coefficients Collinearity Statistics Model B Std. Error Beta t Sig. Tolerance VIF 1 (Constant) -1839.473 1501.161 -1.225 .255 FDI .168 .031 .907 5.497 .001 .938 1.066 FII .045 .019 .379 2.297 .051 .938 1.066 a. Dependent Variable: NIFTY The regression model in the study is appropriate as VIF is 1.066 and Tolerance statistic is 0.938. Further Table V shows that FDI has impact on Nifty movements as p<0.01, hence null hypothesis Ho3 is rejected. However FII has no impact on Nifty movements as p> 0.05, hence null hypothesis Ho4 is accepted.

Conclusion and Recommendation:

i. The staggering decline in the growth rate of FDI is visible from 2015-16 onwards is due to the slowdown in the domestic investment and excessive burden of restrictive regulation in investment and trade. Hence a lot to be done in further improving the ease of doing business to make it a congenial environment for foreign investors in India to invest.

ii. FII in India is increasing at an overwhelming pace since 2016-17 because India remains the best spot for buying stocks by foreign investors in emerging markets. The ongoing trade war between USA and China and the free fall of Turkish Lira has made India a best destination for FII. Moreover the low external debt of India and better corporate results backed by sound macroeconomic fundamentals has lured foreign investors to bet in Indian stocks.

iii. It has been observed that FDI is pro cyclical with the movements in Indian stock market which is evidenced from the strong positive relationship FDI enjoys with Sensex and Nifty.

iv. However FII does not enjoy any significant relationship with Indian stock market. This is good for the stock market in particular and economy in general as it will make Indian stock market less volatile.

v. The decline in the growth rate of FDI coupled with stupendous growth rate in FII is a matter of concern for Indian economy. Decline in FDI if remain unchecked may stall the flow of funds in ongoing infrastructural projects or industrial expansion programmes. Further it may force to shelve off commissioning of new projects due to scarcity of funds.

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vi. Further rise in FII will lead to huge volatility in stock market as FIIs are ‘fair weather friends’ and in future if market conditions are not favorable the investors will take away funds from Indian market as even though India provides high return but in dollar terms the return becomes quite miniscule considering the inflation in India and falling exchange rates.

vii. Further Government should focus on increasing the flow of FDI in India as FDI brings new employment opportunities, increases foreign exchange reserves and facilitates the robust growth of the economy.

viii. Hence it can be concluded that FDI is a major source of foreign investment as it helps in maintaining the growth and stability of the economy thereby making the economy strong and resilient.

References:

[1] Sultana, T.S, D.R and Pardhasaradhi, S. (July 2012), “Impact of FDI and FII flow on Indian Stock Market”. Finance Research, ISSN: 2165-8226, Volume 3, Pp 4-10.

[2] Kapoor, S, D.R and Sachan, R. (April 2015), “Impact of FDI & FII on Indian Stock Market”. International Journal of Research in Finance and Marketing, ISSN 2231-5985, Volume 5(4), Pp 9-17.

[3] Aggarwal, T and Solomon, P, D.R. (2017), “ Trends and Patterns of FDI and FII- Implications for the Future”. Global Journal of Management and Business Research: Economics and Commerce, Online ISSN: 2249-4588 & Print ISSN: 0975-5853, Volume 17(3).

[4] Das, S.K. (2017), “FDI and FII for the Economic Growth of India”. Acme Intellects International Journal of Research in Management, Social Sciences & Technology, ISSN 2320 – 2939 (Print) 2320-2793 (Online), Volume 19(19), Pp 1-14.

[5] Prasad, R.S.R, D.R. and Vishali, L.G. (2017) “An Empirical Study on FII investment pattern in Indian Capital market”. International Journal of Applied Research, Online ISSN: 2394-5869 & Print ISSN: 2394-7500, Volume 3(12), Pp 362 -367.

[6] www. rbi. org [7] www. sebi. org [8] www. dipp. nic.in [9] www. bseindia. com [10] www.nseindia.com

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