IMPACT OF INSTITUTIONAL INVESTORS ON NIFTY VOLATILITY

WITH SPECIAL REFERENCE

TO FOREIGN INSTITUTIONAL INVESTMENTS AND INDIVIDUAL
INVESTMENTS

Submitted By

Ann Tresa Stephen

Reg N.o: 1021238

Under the guidance of

Prof. CKT Chandrashekhara
Head of Administration
CUIM, Bangalore
A Thesis
Submitted in Partial Fulfilment of
the Requirements for the Award of the Degree of
Master of Business Administration
Bangalore, India
2012

DECLARATION

I, Ann Tresa Stephen, hereby declare that the dissertation entitled Impact of Institutional Investors
on Nifty Volatility with special Reference to Foreign Institutional Investments and Individual
investments has been undertaken by me for the award of Master of Business Administration. I have
completed this study under the guidance of Prof CKT Chandrashekhara, Head Of Administration,
Christ University Institute of Management

I also declare that this dissertation has not been submitted for the award of any Degree, Diploma,
Associateship or Fellowship of any other title in this University or any other University

Place: Bangalore

Ann Tresa Stephen

Date:

Register No: 1021238

CERTIFICATE

This is to certify that the dissertation submitted Ann Tresa Stephen on the title Impact of Institutional
Investors on Nifty Volatility With special Reference to Foreign Institutional Investments and
Individual investments is a record of research work done by her during the academic year 2011 2012
Under my guidance and supervision in partial fulfilment of the requirements for the award of the degree of
Master of Business Administration. This dissertation has not been submitted for the award of any Degree,
Diploma, Associate ship or Fellowship or any other title in this University or any other University.

Place: Bangalore
Date:

Prof CKT Chandrashekhara

ACKNOWLEDGEMENT

I am indebted to many people who helped me complete this dissertation.

First, I thank the Vice-Chancellor Dr. (Fr.) Thomas C. Matthew and Pro Vice-Chancellor Dr. (Fr.) Abraham
V. M of Christ University for giving me the opportunity to do this research.

I thank Fr. Thomas T. V., Director, Christ University Institute of Management and Prof. C. K. T.
Chandrasekhara, Head of Administration for their kind support.
I thank Prof. CKT Chandrashekhara for his support and guidance during the course of my research. I
remember him with much gratitude for his patience and motivation, but for which I could not have submitted
this work.
I thank my parents for their blessings and constant support, without which this dissertation would not have
seen the light of day.

Ann Tresa Stephen

TABLE OF CONTENTS:

DECLARATION

II

CERTIFICATE

III

ACKNOWLEDGEMENT

IV

TABLE OF CONTENTS

ABSTRACT

VI

CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY

IX

1.2 FII AND INDIAN STOCK MARKET

IX

1.3 SOURCE OF FII FLOW

XI

1.4 FACTORS AFFECTING FII FLOW

XII

1.5 FOREIGN INVESTMENT IN INDIAN CAPITAL MARKET

XII

1.6 REGULATION RELATING TO FII

XIV

1.7 NIFTY AND FII

XVII

CHAPTER II
LITERATURE REVIEW
2.1 STUDIES CONDUCTED IN INDIA AND ABROAD

XX

CHAPTER III
RESEARCH DESIGN AND METHOD OF STUDY
3.1 PROBLEM STATEMENT

XXVII

3.2 OBJECTIVE

XXVII

3.3 SCOPE OF STUDY

XXVII

3.4 HYPOTHESIS

XXVIII

3.5 PLAN OF ANALYSIS

XXVIII

3.6 VARIABLES FOR STUDY

XXIX

CHAPTER IV
DATA ANALYSIS AND INTERPRETATION
4.1 REGRESSION AND CORRELATION ANALYSIS BETWEEN NIFTY AND FII
YEAR 2011

XXXI

4.2 YEAR 2010

XXXII

4.3 YEAR 2009

XXXIV

4.4 YEAR 2008

XXXV

4.5 QUESTIONNAIRE INTERPRETATION

1) CHI-SQUARE TEST

XXXVIII

2) CHI-SQUARE TEST

XXXIX

CHAPTER V
FINDINGS AND SUGGESTIONS
5.1 FINDINGS

XLI

5.2 SUGGESTIONS

XLII

CHAPTER VI
CONCLUSION

XLIII

BIBLIOGRAPHY

XLV

ANNEXURE

XLVI

ABSTRACT

The Indian stock market though one of the oldest in Asia being in operation since 1875, remained largely
outside the global integration process until the late 1980s. In line with the global trend, reform of the Indian
stock market began with the establishment of Securities and Exchange Board of India in 1988. Among the
significant measures of integration, portfolio investment by FIIs allowed since September 1992, has been the
turning point for the Indian stock market. As of now FIIs are allowed to invest in all categories of securities
traded in the primary and secondary segments and also in the derivatives segment.

The process of integration received a major impetus when the Indian corporate was allowed to go global
with GDR / ADR issues. Starting with the maiden issue of Infosys in March 1999, ADR issues has emerged
as the star attraction due to its higher global visibility. Thus, the Indian stock market, which was in isolation
until recently, turns out to have been sensitive to developments in the rest of the world by the end of the
1990s.
The dissertation work aims to study the impact of Institutional Investors on the Nifty. Even though there are
several institutional investors, only the FII and MF operations are considered. The other institutional
investors do not participate actively in the stock market because of various restrictions.
The analysis of the data is done by taking daily net inflows of FII and MF. These inflows are compared with
the daily Nifty closing prices.
The important finding from this study is that Nifty is influenced by the FII inflows to a considerable extent.
The mutual funds are not actively participating in the index stocks. A larger portion of the equity fund
investment of mutual fund is seen in the non-index and midcap sector. This means that FII are playing in the
index and blue chip stocks and mutual funds in non-index and midcap sector.
The domestic institutional investors have to play an active role in the stock market so as to bring the stability
in the stock market. The stability of the stock market is important indicator of the economic development.

CHAPTER I- INTRODUCTION

BACKGROUND OF THE STUDY

The financial markets have expanded and deepened rapidly over the last ten years. The Indian capital
markets have witnessed a dramatic increase in institutional activity and more specifically that of FIIs. This
change in market environment has made the market more innovative and competitive enabling the issuers of
securities and intermediaries to grow.
In India the institutionalization of the capital markets has increased with FIIs becoming the dominant owner
of the free float of most blue chip Indian stocks. Institutions often trade large blocks of shares and
institutional orders can have a major impact on market volatility. In smaller markets, institutional trades can
potentially destabilize the markets. Moreover, institutions also have to design and time their trading
strategies carefully so that their trades have maximum possible returns and minimum possible impact costs.
Some studies do examine the trading strategies and price impact of foreign institutional trades; however, the
scope is often limited to a single country. This study takes a look at the impact of FII cash flows on Index
volatility in India. FIIs are the largest investors in the Indian stock market. But the common perception that
domestic investors lack market-moving influence is not entirely based on fact.
For the study purpose the daily volatility in cash flows of FIIs were analyzed in relation to the daily
volatility in the National Stock Exchange of India benchmark Index (NIFTY) from Jan.2008 to Dec.2011.
This was done using Correlation analysis and Regression Analysis.

FII and Indian Stock Market

Given this presence of FIIs, their role in determining share price movements must be considerable. Indian
stock markets are known to be narrow and shallow in the sense that there are few companies whose shares
are actively traded. Thus, though there are more than 4,700 companies listed on the stock exchange, the BSE
Sensex incorporates just 30 companies, trading in whose shares is seen as indicative of market activity. This
shallowness would also mean that the effects of FII activity would be exaggerated by the influence their
behavior has on other retail investors, who, in herd-like fashion tend to follow the FIIs when making their
investment decisions.
These features of Indian stock markets induce a high degree of volatility for four reasons. In as much as an
increase in investment by FIIs triggers a sharp price increase, it would in the first instance encourage further
investments so that there is a tendency for any correction of price increases unwarranted by price earnings
ratios to be delayed. And when the correction begins, it would have to be led by an FII pullout and can take
the form of an extremely sharp decline in prices.
Secondly, as and when FIIs are attracted to the market by expectations of a price increase that tend to be
automatically realized, the inflow of foreign capital can result in an appreciation of the rupee vis--vis the
dollar (say). This increases the return earned in foreign exchange, when rupee assets are sold and the revenue

converted into dollars. As a result, the investments turn even more attractive, triggering an investment spiral
that would imply a sharper fall when any correction begins.
Thirdly, the growing realisation by the FIIs of the power they wield in what are shallow markets, encourages
speculative investment aimed at pushing the market up and choosing an appropriate moment to exit. This
implicit manipulation of the market, if resorted to often enough, would obviously imply a substantial
increase in volatility.
Finally, in volatile markets, domestic speculators too attempt to manipulate markets in periods of unusually
high prices. Thus, most recently, the Securities and Exchange Board of India (SEBI) is supposed to have
issued show-cause notices to four as-yet-unnamed entities, relating to their activities on around Black
Monday, May 17, 2004, when the Sensex recorded a steep decline to a low of 4505.
The last two years have been remarkable because, though these features of the stock market imply volatility;
there have been more months when the market has been on the rise rather than on the decline. This clearly
means that FIIs have been bullish on India for much of that time. The problem is that such bullishness is
often driven by events outside the country, whether it is the performance of other equity markets or
developments in non-equity markets elsewhere in the world. It is to be expected that FIIs would seek out the
best returns as well as hedge their investments by maintaining a diversified geographical and market
portfolio. The difficulty is that when they make their portfolio adjustments, which may imply small shifts in
favour of or against a country like India, the effects it has on host markets are substantial. Those effects can
then trigger a speculative spiral for the reasons discussed above, resulting in destabilising tendencies. Thus
the end of the bull run in January was seen to be the result of a slowing of FII investments, partly triggered
by expectations of an interest rate rise in the U.S.
These aspects of the market are of significance because financial liberalisation has meant that developments
in equity markets can have major repercussions elsewhere in the system. With banks allowed to play a
greater role in equity markets, any slump in those markets can affect the functioning of parts of the banking
system.
Similarly, if any set of developments encourages an unusually high outflow of FII capital from the market, it
can impact adversely on the value of the rupee and set of speculation in the currency that can, in special
circumstances, result in a currency crisis. There are now too many instances of such effects worldwide for it
to be dismissed on the ground that India's reserves are adequate to manage the situation.

Thus, the volatility being displayed by India's equity markets warrant returning to a set of questions that
have been bypassed in the course of neo-liberal reform in India. The most important of those questions is
whether India needs FII investment at all. With the current account of the balance of payments recording a
surplus in recent years, thanks to large inflows on account of non-resident remittances and earnings from
exports of software and Information Technology-enabled services, we do not need those FII flows to finance
foreign exchange expenditures. Neither does such capital help finance new investment, focused as it is on
secondary market trading of pre-existing equity. And finally, we do not need to shore up the Sensex, since
such indices are inevitably volatile and merely help create and destroy paper wealth and generate, in the
process, inexplicable bouts of euphoria and anguish in the financial press.
In the circumstances, the best option for the policy maker is to find ways of reducing substantially net flows
of FII investments into India's markets. This would help focus attention on the creation of real wealth as well
as remove barriers to the creation of such wealth, such as the constant pressure to provide tax concessions
that erode the tax base and the persisting obsession with curtailing fiscal deficits, both of which are driven by
Source of FII flow
The sources of these FII flows are varied. The FIIs registered with SEBI come from as many as 28 countries
(including money management companies operating in India on behalf of foreign investors).
1. US-based institutions accounted for slightly over 41%
2. UK constitute about 20%
3. Western European countries hosting another 17% of the FIIs
4. The remaining 22% by other countries
It is, however, instructive to bear in mind that these national affiliations do not necessarily mean that the
actual investor funds come from these particular countries. Given the significant financial flows among the
industrial countries, national affiliations are very rough indicators of the home of the FII investments. In
particular institutions operating from Luxembourg, Cayman Islands or Channel Islands, or even those based
at Singapore or Hong Kong are likely to be investing funds largely on behalf of residents in other countries.
Nevertheless, the regional breakdown of the FIIs does provide an idea of the relative importance of different
regions of the world in the FII flows.

Factors affecting FII flows

FII flows and stock returns: FII flows depend on the performance of the stock exchange of the country.
The EPS of the stock exchange of the country is one of the important factors which have a bearing on the FII
flows in to the country. The FIIs study the average EPS of various countries stock exchange and invest in
the profitable ones. The specific return of specific stocks also influences the FII decisions.
Country risk measures: This includes political and other risks in addition to the usual economic and
financial variables, which may be expected to have an impact on portfolio flows to India though they are
likely to matter more in the case of FDI flows.
FOREIGN INSTITUTIONAL INVESTOR
The term Foreign Institutional Investor is defined by SEBI as under:
"Means an institution established or incorporated outside India which proposes to make investment in India
in securities. Provided that a domestic asset management company or domestic portfolio manager who
manages funds raised or collected or brought from outside India for investment in India on behalf of a subaccount, shall be deemed to be a Foreign Institutional Investor."
SUB ACCOUNT
Sub-account" includes those institutions, established or incorporated outside India and those funds, or
portfolios, established outside India, whether incorporated or not, on whose behalf investments are proposed
to be made in India by a Foreign Institutional Investor.
FOREIGN INVESTMENTS IN INDIAN CAPITAL MARKETS
Indias decision in 1991 to permit Foreign Institutional Investors (FIIs) to invest in India was a major step in
the globalization of Indian capital market. FIIs have played a major role in Indias secondary markets and
have virtually re written the rules of the market in recent years. FIIs drive the stock market, especially in
technology and media stocks, using international valuation models and even linking NASDAQ trends with
Indian market capitalization values. The Reserve Bank Of India monitors FII activity in a daily basis.
Foreign companies/Individuals are permitted to invest in equity shares traded in Indian Stock markets if they
are registered as a Foreign Institutional Investor (FII) or if they have a sub account in India.

Investment in Indian securities is also possible through the purchase of Global Depository Receipts (GDR),
American Depository Receipts (ADR), Foreign Currency Convertible Bonds and Foreign Currency Bonds
issued by Indian issuers, which are listed, traded and settled overseas and mainly denominated in US dollars.
Foreign Investors (whether registered as a FII or not) can also invest in Indian securities outside the FII
route. Such investments require case-by-case approval from the Foreign Investment Promotion Board in the
Ministry of Industry and Reserve Bank of India (RBI), or only by the RBI depending on the size of the
investment and the industry in which this investment is to be made.
FII investments in Indian capital market are more than US $ 11,000 million. Indian Stock market with a
market capitalization of over US $ 165,000 million has been a major attraction for investors all over the
world, because of the new economy boom and excellent functioning of Stock Exchanges in the Country. The
combined daily turnover of National Stock Exchange (NSE) and The Stock Exchange, Mumbai (BSE) is in
excess of US $ 30,000 million. The screen base trading of NSE and BSE provides transparency in execution
of orders, settlement & trade guarantees and elimination of risk of bad deliveries (in case of dematerialized
shares, which constitute over 90% of trade).

INVESTMENT STRUCTURE OF FII INVESTING

REGULATION RELATING TO FII OPERATION

Regulations Regarding Portfolio Investments by Foreign Institutional Investors (FIIs)

Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of
FEMA Notification No.20 dated May 3, 2000. SEBI acts as the nodal point in the entire process of FII
registration.

FIIs are required to apply to SEBI in a common application form in duplicate. A copy of the
application form is sent by SEBI to RBI along with their 'No Objection' so as to enable RBI to grant
necessary permission under FEMA.

RBI approval under FEMA enables an FII to buy/sell securities on stock exchanges and open
foreign currency and Indian Rupee accounts with a designated bank branch.

FIIs are required to allocate their investment between equity and debt instruments in the ratio
of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can
make its entire investment in debt instruments.

FIIs can invest in listed and unlisted securities including shares, debt instruments dated
Government Securities and Treasury Bills. No individual FII/sub-account can acquire more than 10%
of the paid up capital of an Indian company.

All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up
capital of an Indian Company. Indian Companies can raise the above mentioned 24% ceiling to the
Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors
followed by passing a Special Resolution to that effect by its General Body

Presence of Sectoral Cap/ Statutory ceiling means that foreign investment from all sources
cannot exceed a specified level. A Company to which no sectoral cap/statutory ceiling is applicable can
raise the limit of permissible FII investment to 100% of the paid up capital.

A Company to which a 49% cap is applicable can raise the limit of permissible FII investment
to 49% and if there is an existing foreign direct investment of 15%, possible FII investment can only
be up to 34%.

No permission from RBI is needed so long as the FIIs purchase and sell on recognized stock
exchange.

All non-stock exchange sales/purchases require RBI permission.

In order to ensure that the sectoral / statutory ceilings on foreign investment in a company are
not violated due to investment by FIIs, RBI monitors these ceilings for the companies in respect of
which sectoral caps /statutory ceiling have been indicated by Government of India.

When the total holdings of FIIs reaches within 2% of the applicable limit, Reserve Bank
issues a notice to all concerned that any further purchases of the shares of the said Company requires
prior approval of RBI.

High Net worth Individuals /foreign corporates can invest through SEBI Registered FIIs
subject to a sub-limit of 5% each within the aggregated limit of 24%.

Registered Foreign Institutional Investors (FIIs) are allowed to trade in all exchange traded
derivative contracts approved by SEBI from time to time subject to the limits prescribed by SEBI.

Eligibility Criteria to be fulfilled by the Applicant Seeking FII Registration

As per Regulation 6 of SEBI (Foreign Institutional Investors) Regulations, 1995, Foreign Institutional
Investors are required to fulfill the following conditions to qualify for grant of registration:

 Applicant should have track record, professional competence, financial soundness, experience,
general reputation of fairness and integrity;
The applicant should be regulated by an appropriate foreign regulatory authority in the same
capacity/category where registration is sought from SEBI. Registration with authorities, which are
responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor.
The applicant is required to have the permission under the provisions of the Foreign Exchange
Management Act, 1999 from the Reserve Bank of India.
Applicant must be legally permitted to invest in securities outside the country or its in-corporation /
establishment.
The applicant must be a "fit and proper" person.
The applicant has to appoint a local custodian and enter into an agreement with the custodian.
Besides it also has to appoint a designated bank to route its transactions.
Effect Payment of registration fee of US $ 5,000.00.

Investments
Foreign corporate and foreign individuals are eligible to make investments only through the equity route.
The equity investment route permits up to 30% investments in debt instrument. At least 70% of the
investments have to be parked in equity related instruments which include:

Securities in primary and secondary markets (listed or unlisted)

Units of scheme floated by Unit Trust of India and other domestic mutual funds (listed or unlisted)

Warrants and derivative instruments

FIIs and the Sub-Accounts are permitted to tender their securities directly in response to open offer made in
terms of the SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997. FII and the SubAccounts are also permitted to offer their shares in case of buyback of securities and also to lend securities
through an approved intermediary.

Investment limits:

A FII or a Sub-Account can hold up to 10% of paid up equity capital of any company.

The total investments made by all the foreign corporates and foreign individuals shall not exceed 5%
of total issued capital of that company within the aggregate limit for FII portfolio investments.

The total investments by FII and Sub-Accounts in any Indian Company cannot exceed 24% of its
total paid up capital.

However, in certain companies, which have passed a Special Resolution in this regard, the total FII
investment can be made up to 49% of the paid up capital. This limit of 24% / 49% is exclusively
available for investments by FII only.

It may further be noted that this limit of 24% does not include investments made by FII outside the
Portfolio investments route i.e., through the direct investment approval process. Investments made
offshore through purchases of GDR, ADR and convertibles are also excluded.

Thus, the volatility being displayed by India's equity markets warrant returning to a set of questions that
have been bypassed in the course of neo-liberal reform in India. The most important of those questions is
whether India needs FII investment at all. With the current account of the balance of payments recording a
surplus in recent years, thanks to large inflows on account of non-resident remittances and earnings from
exports of software and Information Technology-enabled services, we do not need those FII flows to finance
foreign exchange expenditures. Neither does such capital help finance new investment, focused as it is on
secondary market trading of pre-existing equity. And finally, we do not need to shore up the Sensex, since
such indices are inevitably volatile and merely help create and destroy paper wealth and generate, in the
process, inexplicable bouts of euphoria and anguish in the financial press.
In the circumstances, the best option for the policy maker is to find ways of reducing substantially net flows
of FII investments into India's markets. This would help focus attention on the creation of real wealth as well
as remove barriers to the creation of such wealth, such as the constant pressure to provide tax concessions
that erode the tax base and the persisting obsession with curtailing fiscal deficits, both of which are driven by
dependence on finance capital.

NIFTY AND FII

NIFTY: S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is
used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index
funds.
S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint
venture between NSE and CRISIL. IISL is India's first specialised company focused upon the index as a core

product. IISL has a marketing and licensing agreement with Standard & Poor's (S&P), who are world leaders
in index services.
The traded value for the last six months of all Nifty stocks is approximately 44.89% of the traded value of
all stocks on the NSE
Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.15%
S&P CNX Nifty is professionally maintained and is ideal for derivatives trading
The NIFTY moves up and down based on movement of 50 companies share prices listed in NSE sensitivity
index. The reasons of the rise and fall of the Sensex may be due to macro-level or micro-level factors such as
Government policies, Inflation rate, FDI & FII etc. In our research, we have only considered the FII factor to
find out that is there any impact of the FII on the movement of NIFTY. So, we have taken the help of the
Regression and Correlation tools to measure it.

CHAPTER 2- LITERATURE REVIEW

Studies conducted in India and abroad:

(Ahmad, Khan Masood, Ashraf, Shahid and Ahmed, Shahid, Foreign Institutional Investment Flows
and Equity Returns in India (2005). The ICFAI Journal of Applied Finance, Vol. 11, pp. 16-30, March,
2005.)
This paper examines the relationship between foreign institutional investment and stock returns in India
during 2002-04. The Foreign Institutional Investment as a percentage of market capitalization and floating
stock has been improving over the years. Using NSE Nifty and FII capital flows to the equity market,
Granger-causality, Cross-correlation method and GARCH have been applied to analyse the static and
dynamic relationship between FII flows and Nifty. Granger-causality shows a unidirectional relationship,
indicating that equity returns cause FII flows, whereas Cross-correlation method shows some evidence of
contemporaneous and bi-directional causality. This is an interesting result not reported earlier, and it is
possible that the impact may be strong at the level of individual stock prices. The Foreign Institutional
Investors (FIIs) seem to be positive feedback traders, as there is a strong positive relationship with lagged
daily returns, and the results also show a significant relationship with future equity returns. Individually,
there is significant volatility clustering in FII investments and Nifty series but there is no transmission or
destabilizing effect. It is suggested that information on trade by FIIs must be made publicly available more
speedily.
Froot, O'Connell and Seasholes (2001) have demonstrated that international capital flows 'predict' i.e., lead
price changes. They have found evidence that a one-basis point shock to international portfolio flows results
in a 40 basis point increase in equity prices. The 'herding behaviour' of foreign investors is cited as the
possible explanation for the reverse direction of causality from FII flows to stock market returns. Herding
refers to the tendency of a majority of investors to follow each other and to either only buy or only sell at the
same time. With the incentive structure for fund managers being linked to their performance relative to that
of other funds, there is a great deal of incentive for a foreign portfolio investor to suffer the consequences of
being wrong when everyone is wrong, rather than taking the risk of being wrong when some others are right.
Thus, herding by foreign investors may be quite rational in market place. But such herding can lead to stock
prices spiralling up (or down) in times of price-rise (or fall) and hence push the prices far away from their
fair values and overshoot the market equilibrium.
In 1990s, several research studies have explored the cause and effect relationship between FII flows and
domestic stock market returns but the results have been mixed in nature.
Tesar and Werner (1994,1995), Bohn and Tesar (1996), and Brennan and Cao (1997) have examined the
estimates of aggregate international portfolio flows on a quarterly basis and found evidence of positive,
contemporaneous correlation between FII inflows and stock market returns.
Jo (2002) has shown empirically tested instances where FII flows induce greater volatility in markets
compared to domestic investors while Bae et.al. (2002) have proved that stocks traded by foreign investors
experience higher volatility than those in which such investors do not have much interest.

On the contrary, Gordon and Gupta (2003) have shown that lagged domestic stock market returns are an
important determinant of FII flows.

Bekaert and Harvey (1998), and Errunza (2001) have found evidences that FII flows do not have
significant impact in increasing volatility of stock returns.
In Indian context, Chakrabarti (2001) has observed that foreign institutional investors do not appear to be at
an informational disadvantage compared to domestic investors in the Indian markets. Using a monthly dataset for the period May 1993 to December 1999, he has found that FII net inflows are not only correlated with
the returns in Indian equity market but are more likely the effect than the cause of the Indian equity market
returns. Contrary to the general perception of foreign investors' activities having a strong demonstration
effect and driving the domestic stock market in India, evidence from causality tests conducted by
Mukherjee, Bose and Coondoo (2002) suggests that FII flows to and from the Indian market tend to be
caused by returns in the domestic equity market and not the other way round.
(Li, 2002)The impact study of FIIs flows on domestic stock market is important from government as well as
investor point of view, for example, does the opening up of the market for FII increase speculation in the
market and thus make the market more volatile and more vulnerable to foreign shocks

(Calvo and Mendoza, 2000)The immediate impact of market opening to FIIs is the surge in trading volume
and capital inflows to domestic stock markets, result of which the boom in stock prices. The stock market
boom, typically, does not last for the entire period is of capital inflows. It usually starts with the initial surge
in capital inflows and ends before the episode of capital inflows completely subsides
Similarly Lin et al. (2006) conclude that the investment performance of FIIs high holding stocks is
significantly better than that of FIIs low holding stocks. They presented the evidence that FIIs trading
behaviour has generated better returns and portfolio performance since the stock markets full liberalization.
[Hindu Business Line, 1999]The extent of FII influence on market players can probably be gauged from the
fact that SEBI asked the stock exchanges not to release FII trading details as SEBI decided to release the
data with a one day lag and after due confirmation with the FIIs' custodians.
To give better empirical content to the general understanding that FIIs influence the Indian equity markets
we tried to get detailed data on FII transactions. Our efforts at getting FII-wise information from the RBI and
SEBI, however, did not meet with any success.9 In view of this, we had to rely on other sources
Recently, a new index, Instanex FII index15, has come into existence. This is similar to the Sensex and Nifty.
It gives a feel of the FII pulse, and their moves in the stock markets. The Instanex FII index tracks the 15
stocks in which FII funds have been invested. These 15 stocks under the Instanex index account for 55 per
cent of the market capitalization of the FII holdings. Long-term investors can track the FII investment data
released by SEBI. The net FII investment data helps in understanding the mood of the FIIs. Since they are
key drivers of stock markets, tracking their investment data helps in understanding the decisive direction of
the stock markets.
(Gordon and Gupta, 2003; Wang and Shen, 1999). However, there are also evidences that relationship
between FII and Stock market is weak but in general, FIIs buying pushes the stocks up and their selling
shows the stock market the downward path. Digging into a subjective interpretation of the correlation
between Sensex rally from 2006 to 2008 and FII investment for the same period, one can see that when the
Sensex crossed the 15, 000 marks for the first time, net FII investment was Rs. 31.79 billion. When the
Sensex crossed 17,000 marks, the net FII investment strangely had fallen down to Rs. 10.04 billion. At

19,000 marks, FII investment was lower at Rs. 7.81 billion. But suddenly, when the Sensex breached the
20,000, net FII investment was at Rs. 18.48 billion. That puts paid to the theory that FII have mostly been
reason for the rise in the Sensex (Moin, 2010). FII contribution to the rise of the Sensex is more
psychological than real.
Chakrabarti (2001) made an empirical investigation to see the interrelationship between FIIs flows and
equity returns in India using monthly data. He came with the evidence that the FIIs flows were highly
correlated with equity returns in India. He also found that FIIs flows are more likely to be the effect than the
cause of these returns, which contradicted the view that the FIIs determined market returns in general.
Kulwant Rai & N. R. Banumurthy (2004) marked that FII inflows depends on stock market returns,
inflation rate, and ex- ante risk. In terms of magnitude, the
impact of stock market returns, and ex- ante risk turned out to be the major determinants of FII inflows.
Stabilising the stock market volatility and minimising the ex- ante risk would help to attract more FII, an
inflow of which has positive impact on the real economy.
Sandhya (2004) reported that unexpected flow from FIIs had a greater impact on stock market than
expected flow.
Bansal (2009) opined that when there was a decline in return after the entry of FII in India, the volatility had
been reduced. The volatility of Indian stock market was not only because of FII inflow. There were also
some other factors which influence the volatility of Indian stock market
SSS Kumar(Role of Institutional investors in Indian Stock markets)An important feature of the
development of stock market in India in the last 15 years has been the growing participation of Institutional
Investors, both foreign institutional investors and the Indian mutual funds combined together, the total assets
under their management amounts to almost 18% of the entire market capitalization. His paper examines the
role of these investors in Indian stock markets and finds that the market movement can be explained using
the direction of the funds flow from these investors. He concludes that, the Indian stock markets have really
come of age there were so many 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. The regression results show that the combined might of the Flls and mutual funds are a potent
force, and they infact direction can forecast market direction using the direction of the flow of funds from
Flls and mutual funds, the Granger causality test has showed that the mutual funds in fact lead the market
rise or fall and Flls follow suit.
In the Journal of academic research in economics, a paper titled foreign institutional investors impact
on stock markets in India by Anand Bansal and J S Pasricha, This paper studies the impact of market
opening to FIIs, on Indian stock market behaviour. India announced its policy regarding the opening of stock
market to FIIs for investment in equity and related instruments. Using stock market data related to Bombay
Stock Exchange, for both before and after the FIIs policy announcement day. An empirical examination has
been conducted to assess the impact of the market opening on the returns and volatility of stock return. We
found that while there is no significant changes in the Indian stock market average returns, volatility is
significantly reduced after India unlocked its stock market to foreign investors. It concludes that, On the
basis of above discussion, it can be said that while return declined reasonably after the entry of FIIs, the
volatility has been reduced significantly after their entry. Besides, FIIs investment flows, there may be other
reasons as well that may have some degree of influence on market volatility and return. While the FIIs

investment flows and contemporaneous SENSEX, NIFTY, market capitalization and market turnover have
been strongly correlated in India, the correlation between FIIs investments and market volatility and market
return has been comparatively low. It means volatility in Indian market is not the function of FIIs investment
flows. There may be some other reasons which induced the volatility in Indian market over the time.

Chakrabarti (2001) has examined in his research that following the Asian crisis and the bust of info-tech
bubble internationally in 1998-99 the net FII has declined by US$ 61 million. But there was not much effect
on the equity returns. This negative investment would possibly disturb the long-term relationship between
FII and the other variables like equity returns, inflation, etc. has marked a regime shift in the determinants of
FII after Asian crisis. The study found that in the pre-Asian crisis period any change in FII found to have a
positive impact on the equity returns. But in the post-Asian crisis period it was found the reverse relation that
change in FII is mainly due to change in equity returns. Hence, any empirical exercise on FII has to take care
of this fact.

Stanley Morgan (2002) has examined that FIIs have played a very important role in building up Indias
forex reserves, which have enabled a host of economic reforms. Secondly, FIIs are now important investors
in the countrys economic growth despite sluggish domestic sentiment. The Morgan Stanley report notes that
FII strongly influence short-term market movements during bear markets. However, the correlation between
returns and flows reduces during bull markets as other market participants raise their involvement reducing
the influence of FIIs. Research by Morgan Stanley shows that the correlation between foreign inflows and
market returns is high during bear and weakens with strengthening equity prices due to increased
participation by other players.
Sivakumar S (2003) has analysed the net flows of foreign institutional investment over the years, it also
briefly analyses the nature of FII flows based on research, explores some determinants of FII flows and
examines if the overall experience has been stabilising or destabilising for the Indian capital market.

Agarwal, Chakrabarti et al (2003) have found in their research that the equity return has a significant and
positive impact on the FII. 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. Hence, there is a possibility of bidirectional relationship between FII and the equity returns.
Sandhya Ananthanarayanan (2004) held that as part of its initiative to liberalize its financial markets,
India opened her doors to foreign institutional investors in September, 1992. This event represents a
landmark event since it resulted in effectively globalizing its financial services industry. We study the impact
of trading of Foreign Institutional Investors on the major stock indices of India. Our major findings are as
follows. First, we find that unexpected flows have a greater impact than expected flows on stock indices.
Second, we find strong evidence consistent with the base broadening hypothesis. Third, we do not detect any
evidence regarding momentum or contrarian strategies being employed by foreign institutional investors.
Fourth, our findings support the price pressure hypothesis. Finally, we do not find any substantiation to the
claim that foreigners destabilize the market.

In a paper titled, Dynamic Interaction among Mutual Fund Flows, Stock Market Return and Volatility
by M.Thenmozhi and Manish Kumar, This study has examined the dynamic interaction between mutual
fund flows and security returns and between mutual fund flows and volatility. The results based on the
contemporaneous relationship using daily data suggest that a positive relationship exist between stock
market returns and mutual fund flows measured as stock purchases and sales. This positive concurrent
relationship continues to exist even after controlling for volume. The analysis of causal relationship between
mutual fund flows and market returns show that mutual fund out flows (sales) are significantly affected by
return in the equity market, however, the latter is not significantly influenced by variation in these flows
which suggests negative feedback trading behaviour in the Indian market. The results show that a strong
positive relationship exists between stock market volatility and mutual fund flows measured as stock
purchases and sales. This positive concurrent relationship continues to exist even after controlling for
volume. The analysis on the direction of relationship between volatility and mutual fund flows using the
VAR approach suggests that market volatility is positively related to lag flow, and that shock in flow has a
positive impact on market volatility. The results provide evidence that the relationship is stable even after
including these exogenous variables such as volume and market fundamental variables such exchange rates,
dividend and short term interest rates in the model. Increase in the aggregate inflows and outflows are
associated with more volatile market.

(Davidson and Dutia (1989), Delong et al. (1990), Hendricks et al. (1993), Warther (1995), and Zheng
(1999)). The cash flows into mutual funds have generally been strongly correlated with market returns and
this relationship reflects the momentum trading or feedback trading hypothesis

(Harris et al. 1986; Shleifer, 1986).The hypothesis suggests that a shock to security returns leads to a
change in mutual inflows, which in turn leads to a further change in security returns. It is often stated that
mutual fund flows cause security returns to rise and fall and one possible reason attributed for this is the
price pressure hypothesis

(Lee et al., (1991) and Warther, (1995)) Price pressure theory suggests that increased inflows into equity
mutual funds stimulate a greater demand by individuals to hold stock, and this causes share prices to
increase while the information revelation hypothesis suggests that if mutual fund investors possess
information or if they trade in the same direction as another group of investors who possess information,
then their trades will reveal or be associated with new information. Under this scenario, if mutual fund
investors are well informed their trades will be a signal to buy stocks and the market in this case will not be
responding to fund flows because of price pressure, but rather react efficiently to new information.
However, if mutual fund investors are unsophisticated and have a poor track record (noise traders), then the
signal would be to sell stocks. Though, mutual fund flows and stock returns have a high positive correlation
as cited in literature, it does not necessarily mean that the former causes the latter and vice versa.

Potter (1996) in his study used Granger causality tests to examine the leadlag relationship between returns
and fund flows for several categories of equity funds. The results show the evidence that security returns are
useful to predict flows into aggressive growth funds but not into income funds.

(Warther (1995), Remelona et al.(1997)) Some studies have failed to find evidence that mutual fund flows
are affected by lagged security prices and security prices in one period are affected by mutual fund flows in
previous periods.
Some recent studies (Fortune (1998), Christos et al. (2005), Natalie and Parwada (2007) show that
feedback exists, i.e., security returns do affect future fund flows, and some fund flows do affect future
security returns. However, it has also been found that fundamentals of firm influences fund flows than the
stock returns (Cha and Lee (2001)) and stock volatility influences flow of funds (Goetzmann and Massa
(2003)).

Edwards and Zhang (1998) employed Granger causality test and instrumental variable analysis to examine
the relationship between aggregate monthly mutual fund flows and stock and bond monthly returns. The
result shows that with one exception, flows into stock and bond funds do not affect either stock or bond
returns. However, the magnitude of flows into both stock and bond funds are significantly affected by stock
and bond returns.

CHAPTER 3- RESEARCH DESIGN AND METHOD OF STUDY

Problem Statement:
The stock market is influenced by many factors. Both institutional and individual investors have a critical
role to play in the stock market. The volatility in the market is the result of buying and selling pressure on
the stocks. The excessive buying pressure results in the bull market and the excessive selling pressure result
in bear market. Under this circumstance it may be useful to study the impact of institutional investors on the
market. This study basically aimed at studying the influence of FII and individual investors on one of the
premier stock exchange of India, NSE India.
Objective:
To study the impact of Institutional Investors with special reference to FII Cash flows and individual
investments, on the stock market volatility. This can be further explained as higher the variability of the FII
cash flows, higher will be the volatility of the Index.
Scope of the Study:
The scope of the study is limited only to NSE Nifty. The study includes testing the impact of Institutional
Investors only on NSE Nifty. The scope of the study is limited only to institution investors being FIIs and
individual investments. The other institutional investors have not been considered in the study as they do not
participate actively in the stock market because of various restrictions imposed on their operations
Survey Area: Bangalore
Sampling Unit: Individual investors across Bangalore
Research Design:
A Research Design lays down the foundation for conducting the project. It provides a framework for
carrying on the research project and specifies the details procedures necessary for obtaining the information
needed to structure and/or solve marketing research problems.
The research methodology is based on quantitative research which is a systematic empirical investigation of
social phenomena via statistical, mathematical or computational techniques.
Type of research: Analytical study and Correlation-Regression Analysis
Research Instruments:

Correlation
Regression Analysis
Durbin-Watson study

Hypothesis:
Hypothesis 1Null Hypothesis (H) o : There is no significant impact of FII Cash flows on the NIFTY volatility
Alternate Hypothesis (H1): There is a significant impact of FII Cash flows on the NIFTY volatility

Hypothesis 2Null Hypothesis (Ho) : There is no significant impact of individual investments on the NIFTY volatility
Alternate Hypothesis (H1) : There is a significant impact of individual investments on the NIFTY volatility

Plan of Analysis:

For the study purpose, only NIFTY that is the National Stock Exchange (NSE) benchmark Index is
considered. This is because the larger chunk of FII activity in India happens on the NSE. NSE is the
dominant exchange in India with close to 75% of cash market turnover and well over 90% of derivatives
turnover in India happening on the NSE. The daily index volatility and volatility in daily FII cash flows were
studied. We have also studied the combined effects of individual investments and daily FII volatility on the
Nifty volatility.
The data considered for the study is daily data for four years i.e. from January 2008 to December 2011. This
period also captures some of the great peaks and falls of the Indian market. Moreover this period captures
the significant development in the financial markets in India like introduction of rolling settlements,
derivatives etc.
Statistical models used:

Standard Deviation as a measure of risk

Correlation and regression analysis

Durbin-Watson Statistical Model

Variables for study:

For the analysis purpose primarily two variables were chosen.

They are Daily FII Cash flows and Daily Nifty values. Of these two variables, FII Cash flows is the
independent variable and Index (Nifty) is the dependent variable. For the analysis purpose only net cash
flows were considered i.e. total purchase total sales during the intra-day period.
FII Cash flow is the independent variable. However Index is affected by various factors including liquidity
and hence is the dependent variable. We have also studied the combined effect of another independent
variable namely volatility of daily investment flows combined with daily FII volatility on Nifty volatility.
We have also studied another set of variables, which are Individual investments and NIFTY flows. Where,
Individual investment and NIFTY flows are the dependent variables and Income, Age, Brokers
recommendations, NIFTY stock prices and economic conditions are the independent variables

CHAPTER IV- ANALYSIS AND INTERPRETATION

REGRESSION & CORRELATION ANALYSIS BETWEEN NIFTYAND FII

YEAR 2011:
Summary Output

10000

5000

0
1

10

11

12

-5000

-10000

-15000

Model Summary (b)

Adjusted R
Square
.194

Model
1

R
R Square
.517(a)
.267
a) Predictors: (Constant), FII11
b) Dependent Variable: NIFTY11

Std. Error of
the Estimate
346.74190

Durbin-Watson
.413

ANOVA (b)
Sum of
Squares
Regression
437789.74
5
Residual
1202299.4
78
Total
1640089.2
22
a) Predictors: (Constant), FII11
b) Dependent Variable: NIFTY11
Model
1

df

Mean Square
1

437789.745

10

120229.948

Sig.

3.641

.085(a)

t
50.066
1.908

Sig.
.000
.085

11

Coefficients (a)
Unstandardized
Coefficients
Model
1

B
5396.199
.034
a) Dependent Variable: NIFTY11
(Constant)
FII11

Std. Error
107.781
.018

Standardized
Coefficients
Beta

Residuals Statistics (a)

.517

NIFTY2011
FII2011

Minimum
4998.4502
-1.611

Maximum
5670.6816
1.758

Mean
5319.9292
.000

Std. Deviation
199.49704
1.000

100.143

209.299

137.290

36.029

12

4983.0181
689.75824
-1.989

5577.2109

5307.7298

201.40750

12

416.07120

.00000

330.60543

12

1.200

.000

.953

12

-2.078
752.52820
-2.615

1.345

.016

1.018

12

522.88190

12.19937

377.60896

12

1.410

-.028

1.129

12

Mahal. Distance

.001

3.091

.917

1.008

12

Cook's Distance

.000

.232

.069

.075

12

.000
Dependent Variable: NIFTY11

.281

.083

.092

12

Predicted Value
Std. Predicted Value
Standard Error of
Predicted Value
Adjusted Predicted Value
Residual
Std. Residual
Stud. Residual
Deleted Residual
Stud. Deleted Residual

Centered Leverage Value

a)

N
12
12

Regression Analysis:
The significance level is 0.085 which is higher than the alpha value of 0.05. So we can conclude that at a
confidence level of 95 per cent the null hypothesis cannot be rejected, and that FII has no impact on the
NIFTY.

Correlation: The R-square value is 0.267. So there is no strong correlation between NIFTY and FII.
YEAR 2010:
Summary Output
25000
20000
15000
10000

NIFTY2010

5000

FII2010

0
-5000

9 10 11 12

-10000
-15000

Model Summary (b)

Adjusted R
Square
.175

Model
1

R
R Square
.500(a)
.250
a) Predictors: (Constant), FII10
b) Dependent Variable: NIFTY10

Std. Error of
the Estimate
371.07020

Durbin-Watson
.429

ANOVA (b)
Sum of
Squares
Regression
459638.08
5
Residual
1376930.9
23
Total
1836569.0
08
a) Predictors: (Constant), FII10
b) Dependent Variable: NIFTY10
Model
1

df

Mean Square
1

459638.085

10

137693.092

Sig.

3.338

.098(a)

t
44.035
1.827

Sig.
.000
.098

11

Coefficients (a)
Unstandardized
Coefficients
Model
1
a)

Standardized
Coefficients

B
Std. Error
5383.103
122.246
.021
.011
Dependent Variable: NIFTY10

Beta

(Constant)
FII10

.500

Residuals Statistics (a)

Minimum
5129.6704
-1.766

Maximum
5854.9780
1.782

Mean
5490.7250
.000

Std. Deviation
204.41448
1.000

107.150

226.321

145.740

43.176

12

5154.8101
444.56714
-1.198

5786.6255

5486.7377

197.41589

12

766.55945

.00000

353.80155

12

2.066

.000

.953

12

-1.317
537.52545
-1.375

2.197

.005

1.024

12

867.27924

3.98730

409.26577

12

2.899

.061

1.176

12

Mahal. Distance

.001

3.175

.917

1.150

12

Cook's Distance

.000

.317

.077

.095

12

Centered Leverage Value

.000

.289

.083

.105

12

Predicted Value
Std. Predicted Value
Standard Error of
Predicted Value
Adjusted Predicted Value
Residual
Std. Residual
Stud. Residual
Deleted Residual
Stud. Deleted Residual

N
12
12

REGRESSION ANALYSIS:
The significance level is 0.098 which is higher than the alpha value of 0.05. So we can conclude that at a
confidence level of 95, the null hypothesis cannot be rejected, and that FII has no impact on the NIFTY

CORRELATION:
The R-square value is 0.250. So there is no strong correlation between NIFTY and FII.

YEAR 2009:

Summary Output
20000
15000
10000
NIFTY2009
5000

FII2009

0
1

10

11

12

-5000
-10000

Model Summary (b)

Model
1
a)
b)

Adjusted R
R
R Square
Square
.434(a)
.188
.107
Predictors: (Constant), FII09
Dependent Variable: NIFTY09

Std. Error of
the Estimate
852.18404

Durbin-Watson
.237

ANOVA (b)

Model
1

a)
b)

Sum of
Squares
Regression
1684094.1
52
Residual
7262176.4
41
Total
8946270.5
92
Predictors: (Constant), FII09
Dependent Variable: NIFTY09

df

Mean Square
1

1684094.152

10

726217.644

Sig.

2.319

.159(a)

t
15.556
1.523

Sig.
.000
.159

11

Coefficients (a)
Unstandardized
Coefficients
Model
1
a)

Standardized
Coefficients

B
Std. Error
4052.837
260.527
.063
.041
Dependent Variable: NIFTY09

Beta

(Constant)
FII09

.434

Residuals Statistics (a)

Minimum

Maximum

Mean

Std. Deviation

Predicted Value
Std. Predicted Value

3726.1914
-1.169

4929.6958
1.907

4183.4458
.000

391.27927
1.000

12
12

246.458

548.325

333.340

104.033

12

3648.8279
1110.2658
7
-1.303

5269.3481

4211.7773

443.68162

12

880.41705

.00000

812.52560

12

1.033

.000

.953

12

-1.405
1291.3427
7
-1.488

1.087

-.015

1.029

12

1013.2720
9

-28.33150

950.26955

12

1.098

-.028

1.046

12

Mahal. Distance

.003

3.637

.917

1.257

12

Cook's Distance

.005

.192

.085

.061

12

.000
Dependent Variable: NIFTY09

.331

.083

.114

12

Standard Error of
Predicted Value
Adjusted Predicted Value
Residual
Std. Residual
Stud. Residual
Deleted Residual
Stud. Deleted Residual

Centered Leverage Value

a)

REGRESSION ANALYSIS:
The significance level is 0.159 which is higher than the alpha value of 0.05. So we can conclude that at a
confidence level of 95 per cent the null hypothesis cannot be rejected, and that FII has no impact on the
NIFTY.

CORRELATION:
The R-square value is 0.188. So there is no strong correlation between NIFTY and FII.

YEAR 2008
Summary Output:
10000
5000
0
-5000

9 10 11 12
NIFTY2008

-10000

FII2008

-15000
-20000
-25000
-30000
-35000

Model Summary (b)

Model
1
a)
b)

Adjusted R
R
R Square
Square
.118(a)
.014
-.085
Predictors: (Constant), FII08
Dependent Variable: NIFTY08

Std. Error of
the Estimate
947.02678

Durbin-Watson
.362

ANOVA (b)

Model
1

a)
b)

Sum of
Squares
Regression
126959.75
8
Residual
8968597.2
69
Total
9095557.0
27
Predictors: (Constant), FII08
Dependent Variable: NIFTY08

df

Mean Square
1

126959.758

10

896859.727

Sig.
.142

.715(a)

t
10.114
-.376

Sig.
.000
.715

11

Coefficients (a)
Unstandardized
Coefficients
Model
1
a)

Standardized
Coefficients

B
Std. Error
4086.877
404.081
-.013
.035
Dependent Variable: NIFTY08

Beta

(Constant)
FII08

-.118

Residuals Statistics (a)

Minimum
4073.2212
-1.169

Maximum
4475.4912
2.575

Mean
4198.8333
.000

Std. Deviation
107.43275
1.000

280.484

784.490

362.973

139.064

12

3027.9658
1407.8540
0
-1.487

4549.4395

4101.6961

377.21287

12

1083.1606
4

.00000

902.95461

12

1.144

.000

.953

12

-1.616
1663.8397
2
-1.784

1.248

.034

1.067

12

2109.4841
3

97.13718

1196.46469

12

1.288

.010

1.124

12

Mahal. Distance

.048

6.632

.917

1.836

12

Cook's Distance

.002

1.702

.214

.476

12

.004
Dependent Variable: NIFTY08

.603

.083

.167

12

Predicted Value
Std. Predicted Value
Standard Error of
Predicted Value
Adjusted Predicted Value
Residual
Std. Residual
Stud. Residual
Deleted Residual
Stud. Deleted Residual

Centered Leverage Value

a)

REGRESSION ANALYSIS:

N
12
12

The significance level is 0.715 which is higher than the alpha value of 0.05. So we can conclude that at a
confidence level of 95 per cent the null hypothesis cannot be rejected, and that FII has no impact on the
NIFTY

CORRELATION:
The R-square value is -0.085. So there is no strong correlation between NIFTY and FII

Questionnaire Interpretation:

Individual Investments and influence on NIFTY

GENDER * Fluctuation_prices Cross tabulation:
Fluctuation_prices
Yes
GENDER

Male
Female

Total

No

Total

35
9

37
21

72
30

44

58

102

Chi-Square Tests

Pearson Chi-Square
Continuity
Correction(a)
Likelihood Ratio

Asymp. Sig.
(2-sided)
.084

2.280

.131

3.065

.080

Value
2.990(b)

df

Exact Sig.
(2-sided)

Fisher's Exact Test

Exact Sig.
(1-sided)

.124

Linear-by-Linear
Association

2.961

N of Valid Cases

102

.064

.085

The chi-square test proves the null hypothesis right, that there is no significant association between gender
and investment patters due to fluctuation in NIFTY prices. Investment patters of people irrespective of
whether male or female, are not affected by the fluctuation in NIFTY prices
P value is less than 0.85 and here it is greater than 0.05, so do not reject the null hypothesis.
Annual Income * Economic_condition Cross tabulation
Economic_condition
Yes
Annual Income

Below Rs 2,00,000
Between Rs 2,00,0005,00,000
Between Rs 5,00,00010,00,000
Above Rs 10,00,000

Total

Chi-Square Tests

No

Total

29

37

30

35

22

24

84

17

101

Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear
Association
N of Valid Cases

Value
3.924(a)
3.708
.195

3
3

Asymp. Sig.
(2-sided)
.270
.295

.658

df

101

The chi-square test proves that there is no significant positive relationship between persons annual income
and economic conditions while investing. People, irrespective of their income levels are concerned about the
prevalent economic conditions at the time of investing.
P value of 0.270 is greater than 0.05. Hence, do not reject the null hypothesis.

CHAPTER V- FINDINGS AND SUGGESTIONS

Findings:

After analysing the questionnaire findings about individual investment pattern and their influence on
NIFTY volatility, it can be inferred that we cannot reject the null hypothesis.ie, there is no significant

influence of individual investments on NIFTY volatility.

The correlation between the independent and dependent variables, Foreign Institutional Investors
(FII) and Index (Nifty), on the daily basis is not significant. It means that daily Movement in the

Index cannot be explained by the movement of FII Inflows

The daily price of nifty is not correlated with the inflows of FII in into the nifty. Therefore if the net
investment is positive, then it is not necessary that nifty is also reacting positively and vice versa in

case of negative inflow

The Regression Analysis gives that the FII flow has a greater impact on the volatility of the nifty
index as compared to the individual investments.
The other institutional investors like financial institutions; banks and Insurance companies do not
influence much on the share prices.
The individual investor does not have very important role to play in the stock market, as their
influence on the nifty is minimal. The individual investor includes retail investors, speculators, daily
traders etc.

Suggestions:

The individual investor has a very important role to play in the market. The individual investor
should not base their decision to buy or sell only on the basis of the FII investments flowing into the

market.
Considering the volatility in the stock market, the development of a vibrant local hedge fund industry

is essential.
The domestic individual investor should actively participate in the stock market so that the stock

market is not controlled only by the FIIs.

The individual or retail investor should understand that he has an important role to play in the
market. Proper investor guidance should be provided.

CHAPTER VI- CONCLUSION

Conclusion:
This study analyses the impact primarily of FII Inflows on the volatility of the Index (Nifty). On the basis of
the results from the analysis given above it can be said that the impact of FII cash inflows on the index
volatility is not significant enough to influence the NIFTY prices. The correlation between the FII inflow and
Nifty is negatively. Therefore,
The Null hypothesis of no significant impact of FIIs on NIFTY volatility is accepted
And,

The Null hypothesis of no significant impact of individual investments on NIFTY volatility is accepted.

Bibliography

Ahmad, Khan Masood, Ashraf, Shahid and Ahmed, Shahid, Foreign Institutional Investment Flows
and Equity Returns in India (2005). The ICFAI Journal of Applied Finance
Determinants of Stock Trading Volume Evidence from Indian Stock Markets by Alok
Kumar
Foreign Institutional Investment - A Need of Time by Ajay Dhawle
Foreign Investors and Global Linkages of Indian Equity Markets by Sunil Poshakwale,
Chandra Thapa

SSS Kumar(Role of Institutional investors in Indian Stock markets)

Foreign institutional investors impact on stock markets in India by Anand Bansal and J S Pasricha.

Dynamic Interaction among Mutual Fund Flows, Stock Market Return and Volatility by
M.Thenmozhi and Manish Kumar
JSTOR Economic and Political Weekly, Vol. 32, No. 42 (Oct. 18-24, 1997)
JSTOR Economic and Political Weekly, Vol. 40, No. 8 (Feb. 19-25, 2005), pp. 765-772
Relationships Among Foreign Institutional Investments, Stock Returns and Currency
Change-Over Rates in India by Subrata Kumar Mitra
Some Further Evidence on Behaviour of Stock Returns in India by Gourishankar
Hiremath, Bandi Kamaiah
The Impact of FII Regulations in India A Time-Series Intervention Analysis of Equity
Flows by Dr. Suyash Bhatt
www.sebi-gov.in
www.moneycontrol.com
www.indiainfoline.com
www.rbi.org.in
www.yahoofinance.com

Annexure:
Questionnaire
Dear Sir/Madam,
This is a study intended towards understanding the investment pattern of individual investors in and
around Bangalore. The data collected is purely for academic purposes. I seek only your general views about
the same. I thank you for your co-operation and assure you complete confidentiality of the information you
will so kindly, sincerely and patiently share with me.

1. Gender
Male

Female

2. Age
118 18 30 years

31- 50 years

51.70 ears

71 or more

3. Do you have any prior trading / investment experience?

Yes

No

4. Do you have any investments at present?

Yes

No

5. If yes, how much is your investment amount at present?

Below Rs.25000
Between Rs. 25,000 Rs.100000
Between Rs.100000 Rs.500000
Above Rs.500000
6. Has your investment amount changed with age?
Yes

No

7. How do you think age has influenced your amount of investment?

Least
Influenced
1

8. Annual Income
Below Rs. 200000
Between Rs.200000 Rs. 500000

Highly
Influenced
7

Between Rs. 500000 Rs. 1000000

Above Rs. 1000000
9. Has your income influenced your investment amount?
Yes

No

10. If yes, how do you think it has influenced your investment amount?
Least
Influenced
1

Highly
Influenced
7

11. Do you consult brokers before investing ?

Yes

No

12. If yes, how do you think his recommendations have influenced your investment amount?
Least
Influenced
1

Highly
Influenced
7

13. Does the image/goodwill of the company have an influence on your investment amount?
Yes
No
14. How significantly are influenced by it, if yes?
Least
Influenced
1

in NIFTY stocks?
Yes

No

16. Do the fluctuations in NIFTY prices affect your investment pattern?

Yes

No

Highly
Influenced
7

15.

Have
you
invested

17. If it influences, how significant is the influence?

18.

Least
Influenced
1

Highly
Influenced
7

Highly
Influenced
7

Do
you

consider the current economic conditions while investing?

Yes

No

19. If it influences, how significant is the influence?

Least
Influenced
1

I sincerely thank you for giving up a part of your valuable time and parting with very useful information
which will help us a great deal in my research project.

Sincerely yours,
Ann Tresa Stephen,
II year MBA student
Christ University Institute of Management
Hosur Road, Bengaluru