The Analysis of the factors contributing to the fluctuations of FII in India

Abstract

Foreign Institutional Investment (FII) has emerged as an engine of Indian economic growth as it meets the much needed capital requirement. Though FII has flown largely to Indian market, it is not consistent and stable. FII appears to be sensitive to several global and domestic macroeconomic factors. The present study has the objective to investigate the factors contributing to the fluctuations in the FIIs. The study is based on secondary data which are collected on monthly basis from April, 2005 to December, 2016. A linear multiple regression model has been developed with BSE Sensex, exchange rate, Whole Sale Price Index, Index of Industrial Production and Treasury bill yield rate as explanatory variables and FII as dependent variable. The results show that Exchange rate, Inflation and Treasury bill yield have significant impact on FII in India. It has been found that Exchange rate has inverse relationship with the FII. This leads to the inference that appreciation of the domestic currency may discourage FII in Indian capital market. Surprisingly, inflation seems to have positive impact on FII and Treasury bill yield appears to be inversely related to FII. Based on the outcome of the study, it has been suggested to the government to pursue appropriate monetary and fiscal policy measures to stabilise interest rate, inflation and exchange rate to ensure stable FII inflow to Indian capital market which would strengthen Indian economy.