© 2023 IJNRD | Volume 8, Issue 6 June 2023 | ISSN: 2456-4184 | IJNRD.

ORG

FLOWS OF FOREIGN INSTITUTIONAL

INVESTMENTS ON THE INDIAN STOCK
MARKET
1 M. Javid Khan 2 Dr. KV Geetha Devi

1 Student, Department of Management Studies,

Madanapalle Institute of Technology and Science, A.P

2 Assistant Professor, Department of Management Studies,

Madanapalle Institute of Technology and Science, A.P

1. ABSTRACT:
Capital is seen as a very significant component of economic growth. For a developing nation like India, domestic
capital is insufficient to meet all of the needs of the economy. In that situation, foreign funding is crucial. There
are two types of foreign capital: FDI and FII. Compared to FII, FDI is considered a more reliable foreign money
source. However, FII inflows and outflows have a direct influence on the stock market. As a result, FIIs have
become important players in the Indian Stock Market. In addition to examining the trend and pattern of FII flow
in India, this research also looks at how FII and Nifty are related.

Indian stock markets have recently experienced unheard-of expansion. The patterns of foreign investment in the
stock markets have changed significantly along with growing development and expansion. In this context, the
academic community is increasingly looking into the connection between Nifty and Foreign Institutional
Investors (FIIs). This study's main objective is to analyse this link throughout the course of ten years, from 2013
to 2023. The analysis is done on the connection between FII and the returns on the NIFTY50 broad market index.
To ascertain the relationship between foreign institutional investors and the nifty, this study uses correlation,
regression, and growth trend analysis.

The early 1990s saw the beginning of the financial sector reform, which completely altered India's development
plan. The initial strategy of primarily using loan flows and official development aid to finance the current account
deficit has changed to utilizing non-debt-creating capital flows. Foreign Institutional Investors (FIIs) have been
permitted to invest in financial products in India under this strategy since September 14, 1992, and as a result, the
volume, size, depth, and nature of the Indian financial markets have significantly changed. FIIs are crucial to
emerging economies because they provide capital and funds to companies in developing nations. Since large
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corporations like investment banks, mutual funds, etc. invest a sizable sum of money in the Indian markets,
foreign institutional investors play a crucial role in any economy. Hedge funds, mutual funds, insurance providers,
and investment banks are typical examples of these investors. In most cases, FIIs have stock positions in
international financial markets. Because of the healthy influx of cash as a result, the capital structures of the
companies that FIIs participate in often have improved. As a result, FIIs support capital market expansion and
financial innovation. The domestic financial markets may experience a sharp swing as a result of an FII's arrival.

KEYWORDS: FIIs, NSE, Correlation, Regression, Growth trend.

2. INTRODUCTION:
Domestic Institutional Investors (DIIs) and Foreign Institutional Investors (FIIs) are two categories of highly
organized market participants on the Indian Stock Exchange. The FIIs are institutional bodies that are established
outside of India, unlike the DIIs, which are based in India. They view investment opportunities in the Indian stock
market primarily based on various economic factors relating to Indian industries and the overall long-term growth
story of the country. FIIs are subject to regulation in India by the Securities and Exchange Board of India (SEBI),
and they are required to abide by the rules, which call for institutional investors to register as such. Outside of
India, FIIs are represented by organized investment companies, such as Foreign Pension Funds, Foreign Mutual
Funds, Asset Management Companies (AMCs) and Foreign Securities. Foreign portfolio managers, trusts,
foundations, endowment funds, and so on. As seen by the frequent influence on share prices and associated
indexes, FII activities have an impact on Indian markets.

The massive FII inflows are having an impact on the stock market in general as well as the different types of
shares specifically. FIIs can occasionally cause extreme volatility in share prices and indices. However, there isn't
a clearly defined pattern of their behavior, in part because they have an extremely opportunistic approach to
investing and are influenced by financial factors outside of India and other investment opportunities in other
emerging economies. As a result, there are many variables that could influence how they invest in the Indian
Stock Market.

Investors who invest in the financial assets of a nation other than their own are referred to as foreign institutional
investors. These investments are done by buying stock, bonds, etc. from companies located in other nations. A
"Foreign Institutional Investor" is defined as an institution founded or incorporated outside of India that seeks to
invest in securities in India by the Securities and Exchange Board of India (Foreign Institutional Investors)
Regulations, 1995. Insurance firms, hedge funds, pension funds, and mutual funds make up the majority of FIIs.

Foreign institutional investments are crucial for developing countries and have significantly impacted capital
inflows into India. Even while FDI is still the preferred method of bringing in foreign capital, FIIs have proven
to be quite beneficial. Since FIIs were permitted in India in 1992, there has been a significant change in the way
people invest. The governance structure for FIIs in India has undergone adjustments as well. India was the
preferred equities market for international investors in 2015, with 43% of the vote, followed by China with 26%,

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according to a Bank of America - Merrill Lynch (BofA-ML) survey in which 50 investors took part. The total
amount of FII investment in Indian equities for 2017 was INR 51,252 crores. This is primarily due to the fact that
investors seek to profit from their investments in Indian equity markets, demonstrating that there may be some
relationship between FII investment and stock market success.

If there is a correlation between FII investments and stock market performance, it is important to determine
whether FII investments drive up the stock market performance or whether higher stock market performance
drives up FII investment. This research article intends to investigate a relationship that has been the subject of
ongoing empirical and theoretical inquiry. After demonstrating a link between FII investment and Stock Market
Performance, the cause-effect relationship will therefore be examined because it is conceivable for variables to
be related but yet not have a cause-and-effect relationship. By measuring the returns on broad market indices, it
is possible to gauge stock market performance. To conduct the analysis, NIFTY has been chosen, and data for a
10-year time period will be collected. Ten years of FII data (2013-2023) are collected.

Some major impacts of FII on stock market:

 They increased depth and breadth of the market.
 They played major role in expanding securities business.
 Their attention on the fundamentals of the stock had led to effective pricing of the stock.
 These effects increased the appeal of the Indian stock market to both foreign and domestic investors.
 The influence of FII is so great that anytime FII tends to withdraw money from the market, local investors
become concerned and do the same.

NATIONAL STOCK EXCHANGE:

The National Stock Exchange (NSE) is the leading stock exchange in India. It was established in the year 1992
and it is located in Mumbai. The NSE provides a platform for buying and selling various financial instruments
such as equities, derivatives, currencies, and bonds. It operates on an electronic trading system, which allows for
efficient and transparent trading. The NSE is regulated by the Securities and Exchange Board of India (SEBI) and
follows strict rules and regulations to ensure fair and transparent trading practices. It offers a wide range of
products and services, including cash equities, equity derivatives, currency derivatives, and interest rate
derivatives.

The top 50 companies listed on the exchange make up the Nifty 50, the NSE's premier index. It is frequently used
as a benchmark for the Indian stock market and is regarded as a sign of both investor confidence and market
trends. The NSE was crucial in introducing cutting-edge trading technologies and procedures, and it has
contributed significantly to the growth of the Indian capital market. It has helped the Indian economy expand by
offering a stable and effective platform for capital formation and investment.

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TRADING COMMODITIES:

Through its subsidiary, NSE Clearing Limited (previously known as National Securities Clearing Corporation
Limited or NSCCL), the Indian National Stock Exchange (NSE) provides trading in commodities. On the NSE
platform, the commodity derivatives segment is run by NSE Clearing Limited. Financial instruments known as
"commodity derivatives" get their value from underlying commodities like gold, silver, crude oil, natural gas, and
more. Market participants can use these derivatives to speculate on future commodity price movements or to
protect against price fluctuations.

3. LITERATURE REVIEW:
1. Rahul Dhiman, (2012), Impact of foreign institutional investor on the stock market. The research objective
is to know whether the stock market is affected by foreign investment. The study covered the period from
1st April 2006 to 28th February 2011. The primary source of data is the website of the National Stock
Exchange wherein we got data regarding daily data on FIIs purchases and sales on NSE and Daily
Advances and Decline Data of NSE.
2. Biswa Swaup Misra (2020), The Role of FIIs in the Indian Stock Market. The study uses both daily and
monthly data on Net FII inflows (surplus of FII inflows over FII outflows) for the period April 2007 and
December 2011. The causality analysis performed on monthly data reveals that neither net FII inflows
granger causes return on Nifty nor returns granger cause FII inflows in the four sub-periods.

3. Aditya Vimal, (2022), The Impact of FII on Indian Economy and Stock Market. The data for the study
was gathered from 2011 to 2021 and included monthly FII flow and Nifty50 index data. When collecting
FII data, the total amount of net equity investment was taken into account. Our analysis shows that though
it appears in preliminary analysis (plot similarity and correlation test) that there is a strong correlation b/w
FII Investments and NIFTY50 .this is not the case which gets clear by the conclusion we can draw from
regression analysis.

4. Ruchika Sikarwar (2018), The impact of FII flows on the stock market performance in India. The research
objectives are to determine whether there exists a relationship between FII investment in India and Stock
market performance and to examine the nature of such a relationship. A quantitative approach has been
used by ascertaining variables and using statistical techniques to understand the impact of FII investment
on stock market performance. The present study is empirical in nature as it is data-driven research wherein
proof is sought that certain variables affect other variables in some way.

5. Krishna Kumar, S Sireesha and K Anand, (2018). A Study on the Impact of FII on the Indian Stock
Market. The main objective of this study is to know if the flows of FII investments have an impact on the
volatility and stability of the Indian stock market. This paper studies the impact of FIIs on Nifty 50 from
July 2015 to February 2018 by dividing it into pre and post-demonetization periods. Tools like the ADF
test, Granger’s causality test, correlation, and regression have been used. There was no causality before

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demonetization, but causality was seen after demonetization. A regression equation has been formulated
to determine the relationship between FII and Nifty 50 after demonetization.

4. OBJECTIVES OF THE STUDY:

The main objective of this study is:

1. To analyse the relationship of Foreign Institutional Investors on the Indian stock market.
2. To know the impact of Foreign Institutional Investment on the Indian stock market.
3. To understand the growth trend of Foreign Institutional Investment (FIIs).

5. RESEARCH METHODOLOGY:
For the purpose of the present study of the effect of FIIs on major Index NIFTY of NSE of the Indian Stock
Market. The secondary data have been used from various authentic sources primarily from the NSDL website.
The data of the last 10 years from the calendar year 2013 to the calendar year 2023 have been taken for study and
analysis. The FII Data on a monthly basis have been extracted from the website of NSDL and the data is part of
yearly reports of FII investment in India. On the other side. the most popular equity index of the NSE, as one of
the broad markets benchmarks to compare FII Flows with stocks listed on the NSE. It is based on the free float
market capitalization approach and consists of 50 financially stable and reputable Indian corporates listed on the
NSE. The association between FII operations and the Effect on NSE Index has been studied and examined using
a variety of statistical methods and tests, notably mean, correlation analysis, and regression analysis.

6. LIMITATIONS:
 Data for the cash segment of the equity market are collected; futures and options are not included.
 Only movements in equity market are observed, transactions in debt market are not
covered.
 The study use of secondary data is limited, as different websites display different information about FIIs.
 Only 10 years of FII data taken into consideration.

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7. DATA ANALYSIS AND INTERPRETATION:

GROSS PURCHASES
GROSS PURCHASES

2013048.75
1966975.68

2006560.1
1380095.91
1286877.08

1284954.44
1155606.82
1074332.36

1057705.5
761039.9

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
,

Graph 1: Gross Purchases of FII from 2013 to 2023

The above graph shows year-wise total gross purchases of foreign investments from the year 2013 to 2023. From
the year 2014 to 2023 the gross purchases increased yearly. In the year 2023, the gross purchases move to
2013048.75 Crores which is the highest ever total from the last 10 years.

GROSS SALES 2280804.33

2211688.17
GROSS SALES
1765598.42
1470139.45
1365408.54

1310956.63
1130245.15
1102614.44
1010571.8
686558.35

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Graph 2: Gross Sales of FII from 2013 to 2023

The graph shows year-wise total gross sales of foreign investments from the year 2013 to 2023. In the year 2022
the gross sales are highly increased which is 220804.33 Crores. The lowest gross sales were found in the year
2014.

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NET PURCHASES/SALES
700000 630760.56
600000
500000
400000
300000 201377.26
200000
74481.55
100000 25361.67
0
-100000 2014 2015 2016 2017 2018 -26002.19
2019 2020 2021 2022 2023
-44908.94
-78531.46 -90043.54
-200000
-300000 -198639.42
-274244.23
-400000

NET PURCHASES/SALES

Graph 3: Net Purchases/ Sales of FII from 2013 to 2023

The above graph shows year-wise total net purchases and sales of foreign investments from the year 2013 to 2023.
In the years 2014, 2015, 2017 2021 the net purchases and sales move into positive figures. In the years 2016,
2018, 2019, 2020, 2022,2023 the net purchases and sales move into negative figures.

Table 1: Nifty returns from 2013 to 2023

YEAR NIFTY RETURN %
2014 32.9%
2015 -3.0%
2016 4.4%
2017 30.3%
2018 4.6%
2019 13.5%
2020 16.1%
2021 25.6%
2022 15.7%
2023 2.8%

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RETURN IN %
35

30

25

20

15

10

0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
-5

RETURN IN %

Graph 4: Nifty Return in % from 2013 to 2023

The above graph shows the Nifty returns in % from the year 2013 to 2023. The above returns are taken from the
NSDL website. In the year 2016, the return moves into a negative figure apart from that all the year returns in a
positive figure. The highest return was found in the year 2014 which is 32.9 Percent.

Hypothesis:
1. H0: There is no significant relationship between FIIs investments and nifty.
2. H1: There is a relationship between FIIs investments and nifty.

Correlation between FII and Nifty:

Correlation analysis is a statistical technique used to measure the degree of association or relationship between
two or more variables. It helps determine how changes in one variable are related to changes in another variable.
Correlation is typically measured using correlation coefficients, which provide a numerical value that represents
the strength and direction of the relationship between variables.
Table 2: Correlation analysis
Nifty FII

Pearson Correlation Nifty 1.000 .514

FII .514 1.000

Sig. (1-tailed) Nifty .042

FII .042

N Nifty 10 10

FII 10 10

a. DependentVariable: NiftyReturn

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INTERPRETATION:
Correlation has been used to determine the statistical relationship between variables under study FII and CNX
nifty. Based on the results it can be concluded that there is a moderate positive correlation of 0.51 between FII
and Nifty. Since the significance value is 0.042 which is less than 0.05, we should reject the null hypothesis.
There is a relation between FII and Nifty.

Regression analysis between FII and Nifty:

Regression analysis is a statistical technique used to model the relationship between a dependent variable and one
or more independent variable. It is commonly used for predicting or explaining the behaviour of the dependent
variable based on the values of the independent variables.
Table 3: ANOVA
Sum of df Mean Square F Sig.
Squares
1. Regression 10846905.448 1 10626905.668 3.859 0.35(a)

Residual 28723353.216 10 290213.129

Total 40150258.684 11

a. Predictors: (Constant), Gross Purchases

b. Dependent Variable: Nifty Return

Table 4: Model Summary

Model R R Square Adjusted R Std. Error of the
Square Estimate

1 .514(a) .245 .188 1643.813563

a. Predictors: (Constant), Net Values

Table 5: Coefficient
Un-standardized Standardized
coefficient coefficient

B Std. error Mean square t Sig.

1 (Constant) 2902.533 625.188 4.323 .001

FII .013 .007 .514 1.826 .035

a. Predictors: (Constant), Net Values

b. Dependent Variable: Nifty Return

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INTERPRETATION:
Regression has been used to determine the strength of the relationship between FII and Nifty. R-Square value is
24% which means the model explains the 24% variation. In other words, the independent variable FII is able to
explain the 24% variation of the dependent variable Nifty. The p-value is 0.035 which is less than 0.05 which
means the alternative hypothesis is accepted and there is a significant impact of FII on Nifty.

DESCRIPTIVE STATISTICS:
Descriptive statistics is a branch of statistics that involves summarizing and describing the main feature or
characteristics of a dataset. The mean or average is calculated by summing up all the values in a dataset and
dividing it by the total number of observations. The median is the middle value of a data set when it is arranged
in ascending or descending order. It represents the value below and above which 50% of data falls.

Table 6: Descriptive Statistics

Gross Purchases Gross Sales Net Value

N 120 120 120

Mean 90189.5802 88640.0281 1.549653
Median 91999.0850 8767.2700 1.484053
Variance 1.16459 1.15159 2.09958

INTERPRETATION:
The above data represent descriptive statistics of the FIIs gross purchase, FIIs gross sales, Net Purchase and Sale
on monthly basis. I have taken data April 2013 to March 2023 (120 months) time duration for data analysis. The
Mean value gross purchase is 90189.58 Cr and gross sales is 88640.03 Cr which indicate every month purchase
is higher than sales. The average yearly Nifty return is 14.29% and variance is 24% which indicate Indian stock
market is more volatile.

Growth Trend of FIIs for the period 2013-2023:

Growth trends quantify the rate of growth over a specified period of time. A growth trend can be measured
over any period of time, such as a month, year or decade. Determining the growth trend can help you predict
future growth.

The following formula is useful to calculate the growth trend analysis:

Growth trend = Current Year – Previous Year x 100

Previous Year

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Table 7: Growth Trend Analysis:

YEAR NET PURCHASES/ SALES GROWTH RATE
2013 100087.84 -

2014 74481.55 -25.58%

2015 63760.56 -14.39%

2016 -44908.94 -170.43%

2017 25361.67 277.07%

2018 -78531.46 409.64%

2019 -26002.19 -66.88%

2020 -90043.54 446.29%

2021 201377.26 323.64%

2022 -274244.23 -36.18%

2023 -198639.42 -27.56%

TOTAL 1130.01

INTERPRETATION: It shows that even though the Net Purchases/Sales of Foreign Institutional Investments
are declining, the growth rate has been increasing and decreasing throughout the 10 years due to the fact that
foreign investors are keener on investing in emerging economies rather than settled economies because of the
biggest advantage of the potential high growth and diversification.

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GROWTH RATE
500
446.29
400 409.64
300 323.64
277.07
200
100
0 -25.58 -14.39 -27.56
-66.88 -36.18
-100 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
-200 -170.43
-300

GROWTH RATE

Graph 5: Growth Rate of FII from 2013 to 2023

The above graph shows about the growth rate of foreign investments. In the year 2018 and 2020 the growth rate
is highly increased but after 2020 the growth rate goes into down. There is lot of fluctuation in the stock market.
There is no steady growth in the foreign investments.

8. FINDINGS:
 There is a relationship between the FII and Nifty Stock Market Index.
 FII flows increased and decreased the growth rate from 2013 to 2023.
 The regression analysis shows there is a significant impact of FII on Nifty.
 FII is able to explain the 24% variation of the dependent variable Nifty.
 The descriptive statistics indicate that every month purchases are higher than sales.
 The largest number of FII is from the USA ultimately the foreign investment from USA is the
maximum.
 FII investments seem to have influenced the Indian stock market to a considerable extent. Analysis
suggested a strong influence of FII investments on the nifty.

9. SUGGESTIONS:

 Government rules may make investing more challenging. For instance, restrictive planning regulations
may deter investment. Government tax breaks and subsidies, on the other hand, can promote investment.
Therefore, the government can implement policies to ensure that investment costs are supported, which
will encourage more investment.
 The investor has to be careful of exchange rate fluctuations. Currency movements can impact their
investment returns positively or negatively, so assess and manage this risk accordingly.
 Only if the investor is confident in future costs, demand, and economic prospects will they invest.
Economic expansion and interest rates, as well as the general political and economic environment, will
have an impact on confidence.

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 The investors have to stay update and regularly monitor the market conditions. This will help to make
informed decisions and to take necessary actions.
 Encourage investors from other countries by changing the regulatory policies of FIIs. This will help to
improve the country’s economy.
 To reduce risk, the investor must diversify their holdings across various industries and asset classes. When
a certain market or sector underperforms, diversification helps shield their portfolio from potential losses.

10. CONCLUSION:
Since the introduction of financial reforms in 1991, the Indian Capital Market has seen a number of changes.
Since liberalisation began, the Indian Stock Market has undergone significant changes. It is currently thought to
be one of the most alluring areas for foreign institutional investors (FII). The importance of institutional investors
has greatly expanded as a result of ongoing globalisation. India is regarded as a rising market, and its stock
markets provide all Indian investors with a wide range of appealing investment possibilities. In the past five years,
there have been some notable reforms and developments on the Indian Stock Market, reflecting a growth in FII
trust.

The impact of foreign institutional investors (FIIs) on the Indian stock market is discussed in the study. It was
concentrated on the role that FIIs played in the Indian Stock Market; their percentage of all foreign investments
is unquestionably evidence of the significant amount that they contributed. If one looks at the total FII trade, there
is a steadily growing influence of FIIs in the domestic stock market. Indian Stock Market are an attractive
investment opportunity as they are not dependent on the world economy. Moreover, Indian markets offer a wide
variety of sectors and companies. The only factor that determines the behaviour of the FIIs is the opportunity for
profit, if they feel that a market has the potential for profit, they will invest.

REFERENCES:
1.Siddiqui, A., & Azad, N. (2012). Foreign Institutional Investment Flows and Indian Financial Market:
Relationship and Way Forward. Vision: The Journal of Business Perspective, 16(3), 175-185. doi:
10.1177/0972262912460154

2.H. Kulshrestha. (2014). Impact of Foreign Institutional Investors (FIIs) on Indian Capital Market., IMPACT:
Int. Journal of Research in Business Management.,2(3), 35-52.

3. Ramani, D. (2012). The Impact of FIIs On the Indian Stock Market. International Journal of Scientific
Research, 1(1), 1-3. doi: 10.15373/22778179/jun2012/1

4.Dr. Krishnan Kumar, & Nisha Malik. (2019). Impact of FIIs on Market Capitalization of Indian Stock Market.,4
(2).

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