DO FIIS IMPACT VOLATILITY OF INDIAN STOCK MARKET?

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622 DO FIIS IMPACT VOLATILITY ...
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IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

DO FIIS IMPACT VOLATILITY OF INDIAN STOCK MARKET ? JATINDER LOOMBA* *Assistant Professor, JK Business School, Gurgaon, Haryana, India.

ABSTRACT The Foreign Institutional Investors (FIIs) have emerged as noteworthy players in the Indian stock market and their growing contribution adds as an important feature of the development of stock markets in India. To facilitate foreign capital flows, developing countries have been advised to strengthen their stock markets. As a result, the Indian Stock Markets have reached new heights and became more volatile making the researches work in this dimension of establishing the link between FIIs and Stock Market volatility. Hence, it‟s an interesting topic to ascertain the role of FIIs in Indian Capital Markets. This paper makes an attempt to develop an understanding of the dynamics of the trading behaviour of FIIs and effect on the Indian equity market. The study is conducted using daily data on BSE Sensex and FII activity over a period of 10 years spanning from 01st Jan 2001 to 31st Dec 2011. It provides the evidence of significant positive correlation between FII activity and effects on Indian Capital Market. The analysis also finds that the movements in the Indian Capital Market are fairly explained by the FII net inflows. KEYWORDS: Foreign Institutional Investors (FIIs), Indian Capital Market, BSE SENSEX. ______________________________________________________________________________

Hence, in this age of transnational capitalism, a significant amount of capital is flowing from developed world to emerging economies. Positive fundamentals combined with fast growing markets have made India an attractive destination for foreign institutional investors (FIIs). Although the Foreign institutional investors (FIIs), whose investments are often called 'hot money' because they can be pulled out at anytime, have been blamed for large and concerted

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Until the 1980s, there was a general reluctance towards foreign investment or private commercial flows as India‟s development strategy was focused on self-reliance and import substitution and current account deficits were financed largely through debt flows and official development assistance. A major development in our country, post 1991 has been liberalization of the financial sector, especially that of capital markets. After the launch of the reforms, foreign institutional investors (FIIs) from September 14, 1992, with suitable restrictions, were permitted to invest in all securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India and in schemes floated by domestic mutual funds. A positive contribution of the FIIs has been their role in improving the stock market infrastructure and the SEBI assured its contribution towards its development.

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INTRODUCTION

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

withdrawals of capital from the country at the time of recent financial crisis, they have emerged as important players in the Indian capital market. With over 20 million shareholders, India has the third largest investor base in the world after the USA and Japan. Over 9,000 companies are listed on the stock exchanges, which are serviced by approximately 7,500 stockbrokers. The Indian capital market is significant in terms of the degree of development, volume of trading and its tremendous growth potential, as stated by (Mehra Saniya 2007). So basically, one can compute the correlation coefficient between the BSE Sensex and FII flows. I found it to be a strong correlation between BSE SENSEX and FII activity in Indian Capital Markets. This strong positive correlation always grabs the headlines. It is because of the volatile nature of investor‟s sentiments that FIIs are tracked so closely. It would not be prudent to drive away foreign investors from investing in our country. I had mentioned the importance of foreign capital in the context of a developing economy and that is precisely why the government has been so keen on liberalizing the external financial sector since 1991. If one foreign investor has had a good experience investing in our country, it builds up our reputation in the international community and encourages more foreign investors to invest in our economy. However, a crisis of any kind will create panic among foreign investors as well, and regaining their trust and confidence in our economy will entail another mammoth task ! In India, FII has a positive impact on the stock market, corporate transparency and governance norms. Equity Research, in particular, has significantly benefitted and compelled investment banks to invest in a previously neglected resource. FII is a short term flow and though it may appear as a regular flow, it has to be segregated from FDI and constantly monitored.

FOREIGN INSTITUTIONAL INVESTORS (FII) FII means „Foreign Institutional Investors‟. When investors who have same interest to invest in foreign company, they create the company and start to invest in foreign companies. In India, SEBI defines all these investors as FIIs. Developing countries like India are generally capital scarce. This is because of low levels of income in comparison to other developed countries, which in turn means savings and investments are also lower. So how do developing nations get out of such a situation ? Simple! They borrow money. Countries can thus invest this borrowed money in various social and physical infrastructures, earn a return on them which helps them pay off their debt and simultaneously boost the country to a higher growth trajectory.

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CONCEPTUAL FRAMEWORK

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We know that our country needs more than $150 billion over the next ten years. FII inflows lower the cost of capital and benefit the economy as a whole. We have seen the benefit of this to Indian Companies as they raise money cheaply to finance their capital expenditure programmes. Besides FII inflows, raising the level of transparency/ disclosure and improved corporate governance standards in the system. In the end what really matters is that capital is made available to the businesses and that purpose is served equally by FII capital.

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

However, there is another way in which a country can attract foreign money. This is by way of Foreign Direct Investment (FDI). However there is a slight difference between them. FDI is defined as “long term investment/ acquisition and is associated with investment in capital assets that a parent company makes in a foreign country which eventually leads to creating employment in India. It manifests in various forms i.e. leading to change in management, transfer of technology, increase in production etc. Examples of FDI would include POSCO setting up a steel plant in Orissa (in-bound FDI), Tata buying Arcelor (out-bound FDI) and so on. It is perceived to be beneficial because it increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. Considering the investment is long term in nature, they cannot be immediately converted into cash and are often only liquidated in a worst-case scenario. Whereas; FII is a short term investment by foreign institutions, in the financial markets of other countries. These institutions are generally mutual funds, investment companies, pension funds and insurance houses. The SEBI is the nodal agency for dealing with FIIs and they have to obtain initial registration with SEBI. For granting registration to an FII, the SEBI takes into account the track record of the FII, its professional competence, financial soundness, experience and such other criteria as may be considered relevant by SEBI. Besides, FIIs seeking initial registration with SEBI, they will be required to hold a registration from an appropriate foreign regulatory authority in the country of domicile/ incorporation of the FII. The rules and regulations to enter the Indian market are not much. The fluctuations in the stock market are generally due to the FII investments as the investor can leave the market at any point of time. FII widens and deepens the stock exchanges and provides a better price discovery process for the scripts. It is a fair-weather friend and can desert the nation with what is happening in India right now, thereby pulling down not only our share prices but also wrecking havoc with the Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in.

In countries like India, statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. Yet, we intuitively know that the FIIs are important for the market. They typically start a market rally. Subsequently flows come from all classes of investors. At this stage, the market behaves like a self-organised system.

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Bombay Stock Exchange (BSE) which is one of the oldest in the world and accounts for the largest number of listed companies and has also started a screen-based trading system with the introduction of the Bombay On-Line Trading system. There are 23 recognized stock exchanges in India, including the Over the Counter Exchange of India (OTCEI) for small and new companies and the National Stock Exchange (NSE) which was set up as a model exchange to provide nation-wide services to investors. NSE, which in the recent past has accounted for the largest trading volumes, has a fully automated screen based system that operates in the wholesale debt market segment as well as the capital market segment.

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BOMBAY STOCK EXCHANGE (BSE)

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

No single class of investors drives the market — asset prices go up, driven by the collective momentum of all investors. Finally, the market enters the state of self-organised critically. This is when any negative information could have non-linear effect on the market. The FIIs play a major role during this phase too. So, why is a rise or decline in the market always attributed to the FIIs ? How relevant are FIIs to derive the market rally ? A simple model using FII investments, change in their investments and market returns shows that FIIs do not drive asset returns. The relationship is also not significant if asset returns are used with a time lag. This brings us to the point about the FIIs and the market. The FIIs do matter because their entry starts off a market rally. Further, their exit or rumours of their exit at best temporarily halts the rally. At worst, their exit could halt the rally completely. But the FII factor is not very important when the market functions as a self-organised system. This phase has a longer duration than the entry and exit phase of the rally. That is why statistical models suggest that FII flows do not drive market returns even though they do. Further, FIIs can repatriate capital gains, dividends, incomes received by way of interest and any compensation received towards sale/renouncement of rights offering of shares subject to payment of withholding tax at source. The net proceeds can be remitted at market rates of exchange. The FIIs are playing an important role in bringing in funds needed by the equity market. Additionally, they are contributing to the foreign exchange inflow as the funds from multilateral finance institutions and FDI are insufficient. However, the fact remains that FII investments are volatile and market driven, but this risk has to be taken if the country has to ensure steady inflow of foreign funds.

The stock market shows more reaction to foreign investment as the economy liberalizes. A concern with the entry of FIIs is that they are positive feedback traders—traders who buy when the market increases and sell when the market falls. This acts as destabilizing factor because the sales by FIIs lead the stock market to fall further and their buys increase the stock market as concluded by (Dornbusch and Park, 1995), (Radelet and Sachs, 1998). Not only this, these trades push the stock-prices away from the fundamentals as revealed by studies on contemporaneous relation between FIIs investments and equity returns based on monthly data (Bohn and Tesar, 1996, Berko and Clark, 1997).

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The waves of liberalization results in appreciation of stock price which is followed by inflows from foreign investors as said by (Bekaert and Harvey, 1998 a,b) and (Henry, 1997). As the Indian equity market is growing, the trend and future prospects in foreign institutional investments has become a topic of great concern. A recent research survey by Japan Bank for international operation (JBIC), shows that in the next 3 years, India will be the third most favoured investment destination for Japanese investors. A Smith Barney (a CITI group Division) study says estimated market value of foreign institutional investment in the top 200 companies in India (including ADRs and GRDs) at current market prices is US$43 billion. This is 18% of the market capitalization of BSE 200. It is established in literature that block shareholders influence the firm performance (Cho & Padmanabhan, 2001).

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REVIEW OF LITERATURE

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

(Choe et. al., 1998) examined the influence of FIIs on equity returns in Korea before and during the 1997 Asian crisis and they found no evidence of stock prices falling because of a withdrawal of foreign equity investment. Also, it is not necessary that inviting FIIs to the stock market would increase its volatility as argued by (Rene and Stultz, 1997). (Douma, Kabir and Rejie 2006) investigated the impact of foreign institutional investment on the performance of emerging market firms and found that there is positive effect of foreign ownership on firm performance. They also found impact of foreign investment on the business group affiliation of firms. (Aggarwal, Klapper and Wysocki, 2005) observed that foreign investors preferred the companies with better corporate governance. (Gordon and Gupta, 2003) found causation running from FII inflows to return in BSE. They observed that FIIs act as market makers and book profits by investing when prices are low and selling when they are high. Hence, there are contradictory findings by various researchers regarding the causal relationship between FII net inflows and stock market capitalization and returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs are the cause or effect of stock market fluctuations in India.

(Choe, Kho and Stulz, 1998) have examined the impact of foreign investors on stock returns in Korea before and after the 1997 Asian crisis using daily trade data. They find evidence of positive feedback trading before the crisis. During the crisis period their study reveals a weakening of the herding effect and disappearance of positive feedback trading by foreign investors. In addition they find no evidence of a destabilizing effect of the trades by foreign investors on Korea‟s stock market. Using the measure for herding as developed by (Lakonishok, Shleifer and Vishny, 1992), (Kim and Wei, 2002) also show strong tendencies for herding by foreign investors and offshore investment funds in Korea in a similar time period.

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(Jeong-Bon and Li 2004) found that foreign investors tend to avoid stocks with high cross corporate holdings. They suggested that FII are likely to be efficient processors of public information and are attracted to Japanese firms with low information asymmetry. (Morin, 2000) explored the influence of French model of shareholding and management on FII. They commented that France has undergone rapid change from a financial network economy to a financial market economy. The new pattern has broken the traditional system of cross holding and facilitated the arrival of FII who bring with them new techniques and demands efficient corporate management. There is a growing literature on the determinants of global investment flows and allocations.

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(Dahlquist et al., 2003) analysed foreign ownership and firm characteristics for the Swedish market. They found that foreigners have greater presence in large firms, firms paying low dividends and in firms with large cash holdings. They explained that firm size is driven by liquidity. They measured international presence by foreign listings and export sales. They reiterated that foreigners tend to underweight the firms with a dominant owner. (Covirg et al., 2007) concluded that foreign fund managers have less information about the domestic stocks than the domestic fund managers. They found that ownership by foreign funds is related to size of foreign sales, index memberships and stocks with foreign listing.

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

Most of the existing literature on FIIs in India found that the equity return has a significant and positive impact on the FIIs and stock returns are strongly correlated in India (Agarwal, 1997, Chakrabarti, 2001 and Nair and Trivedi, 2003). But, given the huge volume of investments, foreign investors could play a role of market makers and book their profits, i.e. they can buy financial assets when the prices are declining, thereby jacking-up the asset prices and sell when the asset prices are increasing (Gordon and Gupta, 2003). The possibility of bidirectional relationship between FII and the equity returns was explored by (Bhanumurthy and Rai, 2003). They studied the determinants of foreign institutional investment in India during the period 1994-2002. They found, using monthly data that the equity returns is the main driving force for FII investment and is significant at all levels. They further studied the impact of news on FII flows and found that the FIIs react more (sell heavily) to bad news than to good news. (Bonser-Neal et al., 2002) analyze the foreign trading behaviour on the Jakarta stock exchange (Indonesia) between 1995 and 2000. They concluded positive correlation, but, found no evidence to indicate that such trading behaviour by foreign investors destabilized the market prices during the Asian crisis. (Griffin et al., 2002) using theoretical model and empirically analysing showed that global stock return performance is an important factor in understanding equity flows. (Anthony and Richards, 2002) detected a strong evidence of positive corelationship with respect to domestic, US and regional equity returns, using data for daily net purchases by foreigners in six Asian emerging equity markets over 1999-2001. As against the existing empirical literature that emphasises largely on stock/ firm level analysis, my study has broader coverage. It attempts to analyze aggregate trading by FIIs in India rather than stock level trades of individual investors. Further, keeping in view the greater possibility of homogeneity of trading behaviour in one group, our analysis includes all the FIIs rather than one subset of FIIs as has been the case in earlier studies relating to feedback trading and herding.

To find a correlation between BSE SENSEX and FIIs.

2.

To discover the number of FIIs in India and their investments at BSE.

3.

To understand the movement of SENSEX in context to FIIs.

HYPOTHESES Ho1 : No significant relation exists between BSE SENSEX Absolute Change and FII Activity in Indian Capital Market. Ho2: No significant relation exists between BSE SENSEX Percentage Change and FII Activity in Indian Capital Market. RESEARCH METHODOLOGY The study is descriptive in nature. The total population includes BSE SENSEX and the FIIs and the secondary data was collected through the official website of Bombay Stock

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1.

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OBJECTIVES OF THE STUDY

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

Exchange of India Limited. For calculation, daily BSE SENSEX data was taken and absolute change was calculated. On the same data, percentage change was calculated. The measure of percentage change provides a better picture of the scenario over the absolute change as it is expressed as a comparison to the size of one or both of them. Such measures are often used as more authentic indicators for repeated measurements where the outcomes are expected to be the same. It is a way to express a change in a variable compared to its starting value. Top 25 losses were found out from the total data of 10 years which was then compared with FII Net investments (Net Purchase/Sales) to find out the effect of FII activity on BSE SENSEX which acted as the sample size. The period for which the study was conducted is 10 years (01-Jan-2001 to 31-Dec 11). Individual BSE SENSEX and FII Investment acted as the sample elements. Purposive sampling technique was used to collect the data. TOOL USED FOR DATA ANALYSIS „Pearson correlation‟ was used as the data sets were real and it gives an informative and accurate statement of the strength of the linear association between the two variables. Here, our variables are BSE SENSEX and FII Investments. RESULTS AND DISCUSSION Ho1 : No significant relation exists between BSE SENSEX Absolute Change and FII Activity in Indian Capital Market.

Date

Open

High

Low

Close

Absolute Change

1

21-Jan-08

18919.57

18919.57

16951.50

17605.35

-1314.22

-3296.73

2

06-Jul-09

14962.12

15097.87

13959.44

14043.40

-918.72

-1483.03

3

07-Jan-09

10424.96

10469.72

9510.15

9586.88

-838.08

-1111.25

4

24-Oct-08

9535.41

9570.71

8566.82

8701.07

-834.34

-1431.56

5

18-Oct-07

18827.46

19198.66

17771.16

17998.39

-829.07

-1130.59

6

11-Feb-08

17427.34

17427.34

16457.74

16630.91

-796.43

-1268.67

7

17-Oct-08

10763.34

10786.93

9911.32

9975.35

-787.99

-915.54

8

18-May-06

12163.98

12163.98

11330.45

11391.43

-772.55

-865.39

86

S.No.

FII Activity (Rs. In Cr.)

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TABLE 1: TOP 25 ABSOLUTE LOSSES IN SENSEX AND FII

IRJC

17-Dec-07

20032.67

20032.67

19177.19

19261.35

-771.32

-2151.21

10

24-Jan-08

17920.98

18185.10

17070.05

17221.74

-699.24

-2254.93

11

07-Feb-08

18198.68

18198.68

17492.28

17526.93

-671.75

-860.35

12

20-Jun-08

15194.73

15202.01

14519.27

14571.29

-623.44

-999.31

13

19-May-06

11549.67

11697.11

10799.01

10938.61

-611.06

-1459.21

14

21-Nov-07

19197.57

19218.88

18515.30

18602.62

-594.95

-2007.70

15

22-May-06

11071.63

11142.90

9826.91

10481.77

-589.86

-872.49

16

15-Jan-08

20836.47

20872.93

20203.63

20251.09

-585.38

-365.09

17

31-Mar-08

16226.66

16226.66

15563.15

15644.44

-582.22

-865.79

18

18-Jan-08

19579.61

19715.78

18930.42

19013.70

-565.91

-2146.92

19

11-Nov-08

10405.39

10405.39

9799.45

9839.69

-565.70

-370.95

20

11-Jul-08

14032.06

14066.36

13351.34

13469.85

-562.21

-467.67

21

04-Apr-08

15896.09

15896.09

15303.04

15343.12

-552.97

-467.67

22

03-Mar-08

17227.56

17227.56

16634.63

16677.88

-549.68

-711.31

23

02-Jun-08

16591.46

16632.72

15991.21

16063.18

-528.28

-349.84

24

21-Aug-07

14512.19

14534.51

13941.93

13989.11

-523.08

-138.24

25

17-Mar-08

15326.93

15326.93

14738.27

14809.49

-517.44

-658.22

87

9

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International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

TABLE 2: CORRELATION ANALYSIS BETWEEN ABSOLUTE CHANGE AND FII ACTIVITY AT BSE SENSEX Correlation at Degree of Freedom = 23 &

Pearson obtained

Correlation Resultant Significance

Relationship

Confidence Level of 95 % 0.50

0.672

Significantly Strong

Analysing Table 1 using correlation, the results of which are indicated in table 2, it can be concluded that there is statistically significant relation between BSE SENSEX absolute change and FII activity in Indian Capital Market. Hence, the null hypothesis is rejected. Ho2 : No significant relation exists between BSE SENSEX Percentage Change and FII Activity in Indian Capital Market. TABLE 3: TOP 25 PERCENTAGE LOSSES IN SENSEX AND FII ACTIVITY

2

3

4

5

High

Low

Close

24Oct08

9535.41

8566.82

8701.07

-8.75

-834.34

1431.56

07Jan09

10424.96 10469.72 9510.15

9586.88

-8.04

-838.08

1111.25

17Oct08

10763.34 10786.93 9911.32

9975.35

-7.32

-787.99

-915.54

21Jan08

18919.57 18919.57 16951.50 17605.35 -6.95

-1314.22

3296.73

06Jul-09

14962.12 15097.87 13959.44 14043.40 -6.14

-918.72

1483.03

9570.71

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1

Open

88

S.No. Date

FII Percentage Absolute Activity Change Change (Rs. In Cr.)

IRJC

7

8

9

10

11

12

13

14 15

16

17

11Nov08

10405.39 10405.39 9799.45

9839.69

-5.44

-565.70

-370.95

22May06

11071.63 11142.90 9826.91

10481.77 -5.33

-589.86

-872.49

19May06

11549.67 11697.11 10799.01 10938.61 -5.29

-611.06

1459.21

25Nov08

9160.50

-5.08

-464.97

-161.88

11Feb08

17427.34 17427.34 16457.74 16630.91 -4.57

-796.43

1268.67

9182.80

8649.40

8695.53

18Oct07

18827.46 19198.66 17771.16 17998.39 -4.40

-829.07

1130.59

14Nov08

9799.25

-4.22

-413.83

-811.52

20Jun08

15194.73 15202.01 14519.27 14571.29 -4.10

-623.44

-999.31

11Jul-08

14032.06 14066.36 13351.34 13469.85 -4.01

-562.21

-467.67

05Mar09

8535.03

-337.11

-590.92

12284.49 12284.49 11732.97 11801.70 -3.93

-482.79

1169.33

13109.96 13113.53 12402.84 12595.75 -3.92

-514.21

-590.92

06Oct08 29Sep-

9836.11

8535.03

9267.49

8166.97

9385.42

8197.92

-3.95

89

6

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International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

19

20

21

22

23

24

25

24Jan08

17920.98 18185.10 17070.05 17221.74 -3.90

-699.24

2254.93

15Oct08

11245.27 11257.15 10760.33 10809.12 -3.88

-436.15

1030.79

17Dec07

20032.67 20032.67 19177.19 19261.35 -3.85

-771.32

2151.21

07Feb08

18198.68 18198.68 17492.28 17526.93 -3.69

-671.75

-860.35

15May06

12272.64 12272.64 11770.76 11822.20 -3.67

-450.44

-812.43

21Aug07

14512.19 14534.51 13941.93 13989.11 -3.60

-523.08

-138.24

31Mar08

16226.66 16226.66 15563.15 15644.44 -3.59

-582.22

-865.79

17Dec08

10073.10 10073.10 9682.91

-357.81

-188.65

9715.29

-3.55

90

18

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08

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

TABLE 4: CORRELATION ANALYSIS BETWEEN PERCENTAGE CHANGE AND FII ACTIVITY AT BSE SENSEX Correlation at Degree of Freedom = 23 &

Pearson obtained

Correlation Resultant Significance

Relationship

Confidence Level of 95 % 0.50

0.78

Significantly Strong

Analysing Table 3 using correlation, the results of which are indicated in Table 4, it can be concluded that there is statistically significant relation between BSE SENSEX percentage change and FII activity in Indian Capital Market. Hence, the null hypothesis is rejected. CONCLUSION

The results of my research conveys that, FIIs are strong forces driving the Indian Stock Market which is evident from top twenty five crashes at BSE SENSEX as FIIs were the net sellers in all the leading market crashes. This study further gives the scope for identifying the role of FIIs in India in overall market volatility.

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In the course of capital market liberalization, foreign capital has become increasingly significant source of finance. Hence there has been growing presence of FIIs in Indian stock market evidenced by increase in their nut cumulative investments. This shows that Indian stock markets have become lively in terms of their composition of various constituents of the market. On the other side, the increasing presence of this class of investors leads to reform of securities market in terms of trading and transaction systems, making local markets at par with the international markets. In developing countries like India, foreign capital helps in escalating the productivity of labour and to build up foreign exchange reserves to meet the current account deficit. The increase in FIIs investments brings inflow of capital and the country can have access to foreign capital; however, there are limits in India for FII investment in a single firm. On the flip side, foreign capital is free and unpredictable and is always on the lookout of profit, the reason being, the portfolio managers of these FIIs are always on their toes for booking profits for their dynamic portfolios across countries. There are speculations of broader range on the expectations of foreign institutional investors. It is essential to understand when they withdraw their funds and when they pump in more money. Hence, increased volatility associated with FII investments result in severe price fluctuations which cannot be ignored.

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The Indian stock markets have come of age where there are significant developments in the last 15 years that make the markets on par with the developed markets. The important feature of developed markets is the growing clout of institutional investors and this paper sets out to find whether our markets have also being dominated by institutional investors.

IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

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IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 7, July 2012, ISSN 2277 3622

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