A Study on the Impact of FII on Indian Stock Market

Abstract

Foreign capital is very important especially in developing countries like India. One of the ways to receive this is through a Foreign Institutional Investor (FII). FIIs are basically investors located outside the country in which they are investing. India being one of the largest growing economies with a GDP growth rate of 7.2% in Q3 2017-2018, attracts a huge amount of FIIs. The flows of FII investments have an impact on the volatility and stability of the Indian stock market. After demonetization in India there was major pullback of FII investments. Events like this have a great effect on the economy and in turn the stock market. This paper studies the impact of FIIs on Nifty 50 from July 2015 to February 2018 by dividing it into pre and post demonetization periods. Tools like ADF test, Granger’s causality test, correlation and regression have been used. The results showed a moderately positive correlation between the two variables. There was no causality before demonetization, but causality was seen after demonetization. A regression equation has been formulated to determine the relationship between FII and Nifty 50 after demonetization.