Project Report On ANALYTICAL STUDY OF IMPACT OF FOREIGN INSTITUTIONAL INVESTORS FIIS ON EXCHANGE RATE AND VALUE OF INDIAN NATIONAL RUPEE INR IN T

A
PROJECT REPORT
ON
“ANALYTICAL STUDY OF IMPACT OF FOREIGN INSTITUTIONAL

INVESTORS (FIIS) ON EXCHANGE RATE AND VALUE OF INDIAN
NATIONAL RUPEE (INR) IN TERMS OF VOLATILITY”
Submitted To Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur

In Partial Fulfilment of the Academic Requirements for the Award of the
Degree Of
MASTER OF BUSINESS ADMINISTRATION
Specialization
FINANCIAL MANAGEMENT
SUBMITTED BY
Mr. JAYANTKUMAR C. KUMBHARE
Guided by
Dr. A. A. Paturkar
“Backward Class Youth Relief Committee”

UMRER COLLEGE OF ENGINEERING, UMRER,
NAGPUR-441204. [M.S.]
For The Academic Year
20010-2011
B.C.Y.R.C.’s
UMRER COLLEGE OF ENGINEERING, UMRER
DEPARTMENT OF M.B.A.
CERTIFICATE
Certified that the project report entitled “Analytical Study of Impact of Foreign
Institutional Investors (FIIs) On Exchange Rate and Value of Indian National
Rupee (INR) In Terms Of Volatility” is a bonafide work done under my guidance,by
Mr. Jayantkumar C. Kumbhare
and is submitted to Rashtrasant Tukadoji Maharaj NagpurUniversity, Nagpur in

partial fulfillment of the requirements for the award of degree of Master of Business
Administration during the session 2010-11.
Dr.A. A. Paturkar, Prof.Amit Bankar, [Project Guide],

Co-ordinator,
Professor, M.B.A.Deptt.
Dr. Ambedkar College, U.C.O.E.,Umrer,
Nagpur. Dist:-Nagpur
Dr. A. C. Waghmare
Principal,
U.C.O.E., Umrer
Dist.-Nagpur
ACKNOWLEDGEMENT
I take this opportunity with a great pleasure to express our sincere regards and
deep sense of gratitude to our guide Dr. A. A. Paturkar, Professor, Dr. Ambedkar
College,Nagpur for his valuable guidance, practical suggestions and encouragement to
bring about the completion of project.
It is through his proficient knowledge, valuable guidance and support that this
project report has been set right.
I am also thankful to all faculty of M.B.A. Department of U.C.O.E., Umrer who

have always co-operated while carrying out the project work.
I also express gratitude towards Prof. Amit Bankar, Co-ordinator,Dept.of

M.B.A., and Dr. Atul C. Waghmare, Principal U.C.O.E., Umrer for their
encouragement and timely suggestions.
Finally, I would like to thank our well wishers, critics who helped directly or
indirectly in the completion of this work.

DECLARATION
I hereby declare that the project entitled “Analytical Study of Impact of Foreign
Institutional Investors (FIIs) On Exchange Rate and Value of Indian National
Rupee (INR) In Terms Of Volatility”is a bonafide record of work done by me under
supervision of Dr.A.A.Paturkar.
The project is entirely original and has not been submitted to any university for
the award of any degree, diploma or any other similar title.
Place: Umrer
Date: / / 2011
INDEX
Chapter No. Particulars Page No.
1 Executive Summary
Introduction
2.1. Introduction of Topic
2
2.2. Introduction of FII
2.3. What is Indian National Rupee [INR]?
2.4. Introduction of Exchange market of

India
2.5 Introduction of Volatility
3 Objective of the Study
4 Scope & Need of Study
Research Methodology
5.1. Problem Definition

5
5.2. Research Design
5.3. Data Collection
6 Hypothesis
7 Data Tabulation
8 Data Interpretation and Analysis
9 Hypothesis Testing
10 Conclusion
11 Limitation
12 Bibliography
Chapter No.1
EXECUTIVE SUMMARY
Executive Summary
The project topic is on “Analytical Study of Impact of Foreign Institutional

Investors (FIIs) On Exchange Rate and Value of Indian National Rupee (INR) In Terms
Of Volatility”. This project has covered introduction about Foreign Institutional Investors
(FIIs), Indian National Rupee (INR)& Exchange market of India.
The main objective of this study is to analyze the impact of the investment made
by FIIs on exchange rate of Indian rupee. The study reflects that the scope and trading
mechanism of foreign institutional investors in India. The study explain that find out the
relationship between the FIIs equity investment pattern and Exchange rates.
The study analysis that the impact of foreign institutional investors on exchange
rate and value of Indian national rupee in terms of volatility. The effectiveness of the
volatility of the exchange rate denote that the up and down in the exchange rate due to
fluctuation of the FIIs.
Under the study, various role and function of foreign institutional investors in the
Indian capital market on exchange rates and value of Indian national rupee in terms of
volatility. The study also reveals thevolatility of the exchange rate is an unavoidable
situation which is bound to happen over a period of time.
Finally, the project hasbeen concluded that the of FII net inflow has shown the positive
correlation with the exchange rate. That means when the FII net inflow done then
appreciate the rupee value and the exchange rate increased and vice versa.
On the other hand, the net FII inflow/outflow has been increased the volatility of
exchange rate. It proves that standard deviation of exchange rate before and after FII
inflow/outflow. In this analysis standard deviation more after the FII investment started
in India.Volatility of the exchange rate denote to the ups and down in the exchange rate
due to fluctuation of the FIIs.
Chapter No.2
Introduction
2.1: Introduction of Topic
In this project we will try to understand the concept of the Foreign Institutional
Investment (FII) and their role and effect on the exchange rate of Indian Rupee means the
fluctuation in FII investment affects the value of exchange rate or not.
In order to understand the role and effect of the FII on Indian Rupee we need to
know in brief about the Foreign Institutional Investment and Exchange Rate of Indian
National Rupee.
2.2:FII (Foreign Institutional Investors)
Foreign institutional investor means an entity established or incorporated outside

India for the purpose of making investments into the Indian securities market under the
regulations prescribed by SEBI.Positive tidings about the Indian economy combined with
a fast-growing market have made India an attractive destination for foreign institutional
investors.
‘FII’ include “Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies, a
trustee or power of attorney holder incorporated or established outside India proposing to
make proprietary investments or investments on behalf of a broad-based fund. FIIs can
invest their own funds as well as invest on behalf of their overseas clients registered as
such with SEBI. These client accounts that the FII manages are known as ‘sub-accounts’.
A domestic portfolio manager can also register itself as an FII to manage the funds of
sub-accounts.
Foreign Institutional Investors (FIIs) are entities established or incorporated

outside India and make proposals for investments in India. These investment proposals
by the FIIs are made on behalf of sub accounts, which may include foreign corporate,
individuals, and funds etc. In order to act as a banker to the FIIs, the RBI has designated
banks that are authorized to deal with them. The biggest source through which FIIs invest
is the issuance of participatory Notes (P-Notes), which are also known as offshore
Derivatives.
Foreign Investment refers to investments made by residents of a country in
financial assets and production process of another country. After the opening up of the
borders for capital movement these investments have grown in leaps and bounds. But it
had varied effects across the countries. It can affect the factor productivity of the
recipient country and can also affect the balance of payments[BOP]. In developing
countries there was a great need of foreign capital, not only to increase their productivity
of labour, but also helps to build the foreign exchange reserves to meet the trade deficit.
Foreign investment provides a channel through which these countries can have access to
foreign capital. It can come in two forms: Foreign Direct Investment (FDI) and Foreign
PortfolioInvestment (FPI).
Foreign Direct Investment [FDI] involves in the direct production activity and
also of medium to long-term nature. But the Foreign Portfolio Investment[FPI] is a
short-term investment mostly in the financial markets and it consists of Foreign
Institutional Investment (FII). The FII, given its short-term nature, might have bi-
directional causation with the returns of other domestic financial markets like money
market, stock market, foreign exchange market etc. Hence, understanding the
determinants of FII is very important for any emerging economy as it would have larger
impact on the domestic financial markets in the short run and real impact in the long run.
The present study examines the determinants of foreign portfolio investment in the Indian
context as the country after experiencing the foreign exchange crisis opened up the
economy for foreign capital.
India, being a capital scarce country, has taken lot of measures to attract foreign
investment since the beginning of reforms in 1991. Till the end of January 2003 it could
attract a total foreign investment of around US$ 48 billions out of which US$ 23 billions
is in the form of FPI. FII consists of around US$ 12 billions in the total foreign
investments. This shows the importance of FII in the overall foreign investment
programme. As India is in the process of liberalizing the capital account, it would have
significant impact on the foreign investment and particularly on the FII, as this would
affect short-term stability in the financial markets. Hence, there is a need to determine the
push and pull factors behind any change in the FII, so that we can frame our policies to
influence the variables which drive-in foreign investment. Also FII has been subject of
intense discussion, as it is held responsible for intensifying currency crisis in 1990’s
elsewhere.
The present study would examine the determinants of FII in Indian context. Here
we make an attempt to analyze the effect of return, risk and inflation, which are traced to
be major determinants in the literature on FII. The proposed relation (discussed in detail
later) is that inflation and risk in domestic country and return in foreign country would
adversely affect the FII flowing to domestic country, where as inflation and risk in
foreign country and return in domestic country would have favorable affect on the same.
In the next section we would briefly discuss the existing studies. In section 3, we discuss
the theoretical model. Section 4 briefly discusses the trends in FII in India. Database and
methodology adopted in this study are discussed in Section 5. In section 6, we discuss the
estimated results and conclusions are drawn accordingly in the last section.
Entry Option for FII’S
A foreign company planning to set up business operations in India has the following
options:
1. Incorporated Entity
By incorporating a company under the Companies Act,1956 through
• Joint Ventures; or
• Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the

requirements of the investor, subject to equity caps in respect of the area of activities
under the Foreign Direct Investment (FDI) policy.
2. Important terms to know about FIIs:

Sub-account :
Sub-account includes those foreign corporations, foreign individuals, and institutions,

funds or portfolios established or incorporated outside India on whose behalf investments
are proposed to be made in India by a FII.
Designated Bank:
Designated Bank means any bank in India which has been authorized by the Reserve
Bank of India to act as a banker to FII.
Domestic Custodian:
Domestic Custodian means any entity registered with SEBI to carry on the activity of
providing custodial services in respect of securities.
Broad Based Fund:
Broad Based Fund means a fund established or incorporated outside India, which has at
least twenty investors with no single individual investor holding more than 10% shares or
units of the fund. Provided that if the fund has institutional investor(s) it shall not be
necessary for the fund to have twenty investors.
If the fund has an institutional investor holding more than 10% of shares or units in the
fund, then the institutional investor must itself be broad based fund.
3. Unincorporated Entity
As a foreign Company through

Liaison Office/Representative Office
Project Office
Branch Office
4. FOREIGN INSTITUTIONAL INVESTORS REGISTRATION

Following entities / funds are eligible to get registered as FII:
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance or reinsurance companies
• Investment Trusts
• Banks
• Endowments
• University Funds
• Foundations
• Charitable Trusts or Charitable Societies
Further, following entities proposing to invest on behalf of broad based funds, are also
eligible to be registered as FIIs:
• Asset Management Companies
• Institutional Portfolio Managers
• Trustees
• Power of Attorney Holders.

FIIs can invest in the stocks and debentures of the Indian companies. In order to
invest in the primary and secondary capital markets in India, they have to venture through
the portfolio investment scheme (PIS). According to RBI regulations, the ceiling for
overall investment of FIIs is 24% of the paid up capital of the Indian company. The limit
is 20% of the paid up capital in the case of public sector banks. However, if the board and
the general body approve and pass a special resolutions, then the ceiling of 24% for FII
investment can be raised up to sectoral cap for that particular segment. In fact, recently
SEBI allowed FIIs to invest in unlisted exchanges as well, which means both BSE and
NSE (the unlisted bourses) can now allot shares to FIIs also.
Parameters on which SEBI decides FII applicants’ eligibility
As per Regulation 6 of SEBI (FII) 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.
• Payment of registration fee of US $ 5,000.00

"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying
for FII registration.
Supporting documents required are:
• Application in Form A duly signed by the authorized signatory of the applicant.
• Certified copy of the relevant clauses or articles of the Memorandum and Articles
of Association or the agreement authorizing the applicant to invest on behalf of its clients
• Audited financial statements and annual reports for the last one year , provided
that the period covered shall not be less than twelve months.
• A declaration by the applicant with registration number and other particulars in

support of its registration or regulation by a Securities Commission or Self Regulatory
Organisation or any other appropriate regulatory authority with whom the applicant is
registered in its home country.
• A declaration by the applicant that it has entered into a custodian agreement with
a domestic custodian together with particulatrs of the domestic custodian.
• A signed declaration statement that appears at the end of the Form.
• Declaration regarding fit & proper entity.
The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in
favour of "Securities and Exchange Board of India" payable at New York”.
SEBI generally takes 7 working days in granting FII registration. However, in cases
where the information furnished by the applicants is incomplete, seven days shall be
counted from the days when all necessary information sought, reaches SEBI.
In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments
from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted
from the day no objection is received from RBI.
The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to
be renewed.
Same as initial registration, Along with "Form A" and all the relevant documents, the
applicants are required to fill in additional form (Annexure 1) while applying for renewal.
US $ 5,000 needs to be paid for renewal of FII registration.
The application for renewal should be submitted three months before expiry of the FII
registration. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only.
The procedure for registration of FII/sub-account, under 100% debt route is similar to
that of normal funds besides a clear statement by the applicant that it wishes to be
registered as FII/sub-account under 100% debt route.
The FII registration application should be sent to:
Securities and Exchange Board of India
Division of FII & Custodian
Mittal Court "B" Wing, First Floor
224, Nariman Point
Mumbai 400 021
India.
SUB-ACCOUNT REGISTRATION
 Institution or funds or portfolios established outside India, whether incorporated

 or not.
 Proprietary fund of FII.
 Foreign Corporates
 Foreign Individuals.
The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account
are required to sign the Sub-account application form.
"Annexure B" to "Form A" (FII application form) needs to be filled when applying for
sub-account registration. No document is needed to be sent with annexure B. The fee for
sub-account registration is US$ 1,000. The fee is to be submitted at the time of
submitting the application. The mode of payment is Demand Draft in the name of
"Securities and Exchange Board of India" payable at New York. SEBI generally takes
three working days in granting FII registration. However, in cases where the information
furnished by the applicants is incomplete, three days shall be counted from the days when
all necessary information sought, reaches SEBI. The validity of sub-account registration
is co-terminus with the FII registration under which it is registered. The process of
renewal of sub-account is same as initial registration. Renewal fee in this case is US $
1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.
POST-REGISTRATION PROCESSES:
If a registered FII/sub-account undergoes name change, then the FII need to promptly
inform SEBI about the change. It should also mention the reasons for the name change
and give an undertaking that there has been no change in beneficiary ownership.
In case of name change of FII, the request should be accompanied with documents from
home regulator and registrar of the company evidencing approval of name change, and
the original FII registration certificate issued by SEBI should be sent back for necessary
amendment.
Procedure for transferring a sub-account from one FII to another:
The FII to whom the Sub-account is proposed to be transferred has to send a request
along with a declaration that it is authorized to invest on behalf of the Sub-account. The
transferor FII should also submit a No-objection certificate.
The FII should send a request, along with no-objection certificate from existing domestic
custodian, for change in domestic custodian.
The FII would be required to send a request for cancellation of its registration or
registration of its Sub-account/s clearly mentioning the name and registration number of
the entity. The FII should ensure that it / Sub-account has nil cash / securities holdings.
Procedure for change of local custodian:
In case of change of the local custodian of the FII / sub-account, the change should be
intimated to SEBI by the FII. On receipt of no objection from the existing custodian and
acceptance from the proposed custodian, the change of custodian would be approved - by
SEBI.
Procedure for registration as FII/sub account under 100% debt route:
The procedure for registration of FII/sub account under 100% debt route is similar to that
of normal funds besides a clear statement by the applicant that it wishes to be registered
as FII/sub account under 100% debt route. However, Government of India allocates the
overall investment limit for 100% debt funds annually. The grant of investment limit for
individual 100% debt funds is within this overall limit. The funds have to seek further
investment limit in case the limit allotted to them is exhausted and they wish to invest
further.
A Foreign Institutional Investor having an account with one custodian can open accounts
with different custodians for its different sub-accounts. However, one sub-account cannot
be custodial with more than one custodian.
Procedure if an existing sub-account wants to get registered as a Foreign Institutional
Investor:
In case if a registered sub-account wishes to get itself registered as a Foreign Institutional
Investor, then it will have to apply in Form A to SEBI for the same and has to satisfy all
the eligibility criteria norms mentioned in SEBI (Foreign Institutional Investor)
Regulations, 1995. It should also submit a letter from the old FII indicating its 'No-
objection' to such registration.
Procedure for renewal of FII/Sub-Account registration:
They have to apply before 3 months of the expiry of registration in Form A. Circular No
FITTC/CUST/09/2000 dated September 21, 2000 may be referred.
If the FII does not renew its/sub-account’s registration:
The registration of the FII / Sub-account would get expired at due date and it would not
be allowed to trade in Indian securities markets. If it is not interested in renewal but has
certain residual assets, it can apply for disinvestment in terms of Circular No.
FITTC/CUST/12/2001 dated June 04, 2001 and abides by the guidelines specified in this
regard.
Scope of Investments under the Portfolio Investment Scheme.

FIIs, under the Portfolio Investment Scheme, are permitted to make both primary and
secondary investments in the Indian capital markets. Unlike an investor which relies
solely on FDI regulations, a foreign investor which registers as a FII would be allowed to
buy and sell securities over Indian stock exchanges. In addition, FIIs are entitled to effect
transactions in a broader category of securities than an investor relying on FDI
regulations alone. FIIs are permitted to purchase equity securities (both listed and
unlisted), units of schemes floated by the Unit Trust of India and other domestic
municipal funds, warrants, debentures, bonds, governmental securities and derivative
instruments which are traded on a recognized stock exchange. There is no limit on the
amount that FIIs may invest in the Indian market, and no lock-up periods apply to
investments made by FIIs.
Exchange Controls
FIIs are required to open up one or more bank accounts with certain designated banks and
must also appoint a domestic custodian for custody of investment made by the FII.
Through the designated accounts, FIIs are authorized to freely transfer funds from foreign
currency accounts to Rupee accounts and vice versa; make Rupee denominated
investments in Indian companies; freely transfer after-tax proceeds from Rupee accounts
to foreign currency accounts, and repatriate capital, capital gain, dividends interest
income and other gains, subject to deduction for applicable withholding taxes. So long as
FIIs execute purchases and sales on a recognized Indian stock exchange, they are not
required to obtain transaction specific approval from the Reserve Bank. FIIs are also
entitled to effect transactions using their own proprietary funds, or the funds of their sub
accounts.
Investment Restrictions.
Certain limitations apply to investments by FIIs into India. First, FIIs’ and their sub-
accounts’ investment in an Indian company can not exceed ten percent (10%) of the total
issued share capital of the Indian company (five percent if the subaccount is a foreign
corporation or individual). In addition, the aggregate investment of all FIIs in an Indian
company may not exceed twenty four percent (24%) of its total issued share capital,
without the express approval of its board of directors and shareholders. Even with board
of director and shareholder approval, the same sectoral limits which apply to foreign
direct investment would continue to apply. FIIs may register with SEBI as a debt fund or
an equity fund. FIIs which are registered as equity funds, are required to invest at least
seventy percent (70%) of their funds in equity and equity-related securities. A FII
registered as a debt fund, on the other hand, must invest one hundred percent (100%) of
its funds in debt instruments. Foreign corporations and individuals are not eligible
subaccounts of a FII that is registered as a debt fund. FIIs are not permitted to engage in
short selling, other than in respect of derivative securities traded over a recognized
exchange, and must effect transactions through a registered stock broker. Sector
investment prohibitions and caps which apply to foreign direct investment also apply to
investments by FIIs, and FII investments must also comply with the pricing requirements
applicable to foreign direct investment. In addition, FIIs are not permitted to invest
in print media.
Trend of FIIs with the help of economic figures:

• In 2004, FII investments crossed $9 billion, the highest in the history of Indian
capital markets.
• The total net investment for the year up to December 29 stood at US$9,072
million while foreign investors pumped in about US$2,113 million in December.
• Korea and Taiwan have always been the biggest recipients of FII money. It was
only in 2004 that India managed to receive the second highest FII inflow at over $8.5bn.
• In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese

equities.
• On 9th March 2009, India's exceptional growth story and its booming economy
have made the country a favourite destination with foreign institutional investors (FIIs). It
has continued to attract investment despite the Satyam non-governance issue and the
global economic contagion impact on Indian markets.
• According to Mr Gautam Chand, CEO of Instanex, said FIIs are the largest
institutional investors in India with holdings valued at over US$ 751.14 billion as on
December 31, 2008.
• They are also the most successful portfolio investors in India with 102 per cent
appreciation since September 30, 2003.
• As per SEBI, number of registered FIIs stood at 1626 and number of registered
sub-accounts stood at 4972 as on March 17, 2009.
Future Prospects of Foreign Institutional Investments:
• Sustaining the growth momentum and achieving an annual average growth of 9-
10% in the next five years.
• Simplifying procedures and relaxing entry barriers for business activities and
Providing investor friendly laws and tax system.
• Checking the growth of population; India is the second highest populated country
in the world after China. However in terms of density India exceeds China, as India's land
area is almost half of China's total land. Due to a high population growth, GNI per capita
remains very poor. It was only $ 2880 in 2003 (World Bank figures).
• Boosting agricultural growth through diversification and development of agro

processing.
• Expanding industry fast, by at least 10% per year to integrate not only the surplus
labour in agriculture but also the unprecedented number of women and teenagers joining
the labour force every year.
• Developing world-class infrastructure for sustaining growth in all the sectors of

the economy
• Allowing foreign investment in more areas.
• Effecting fiscal consolidation and eliminating the revenue deficit through revenue
enhancement and expenditure management.
• Global corporations are responsible for global warming, the depletion of natural
resources, and the production of harmful chemicals and the destruction of organic
agriculture.
The government should reduce its budget deficit through proper pricing
mechanisms and better direction of subsidies. It should develop infrastructure with what
Finance Minister P Chidambaram International Research Journal of Finance and
Economics - Issue 5 (2006) 171 of India called “ruthless efficiency” and reduce
bureaucracy by streamlining government procedures to make them more transparent and
effective.
Empowering the population through universal education and health care, India
must maximize the benefits of its youthful demographics and turn itself into the
knowledge hub of the world through the application of information and communications
technology (ICT) in all aspects of Indian life although, the government is committed to
furthering economic reforms and developing basic infrastructure to improve lives of the
rural poor and boost economic performance. Government had reduced its controls on
foreign trade and investment in some areas and has indicated more liberalization in civil
aviation, telecom and insurance sector in the future.
Who all can get registered as FIIs
There is a long list of entities that are eligible to get registered as FIIs such as pension
funds, mutual funds, insurance companies, investment trusts, banks, university funds,
endowments, foundations, sovereign wealth funds, hedge funds and charitable trusts. In
fact, asset management companies, investment managers, advisors or institutional
portfolio managers set up and/or owned by NRIs are also eligible to be registered as FIIs.
The nodal point for FII registrations is SEBI and hence all FIIs must register themselves
with SEBI and should also comply with the exchange control regulation of the central
bank. Apart from being allowed to invest in securities in primary and secondary markets
FIIs can also invest in mutual funds. Dated government securities, derivatives traded on a
recognized stock exchange and commercial papers.
Investment Ceilings for FIIs and its Regulations:
Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and persons

of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital
markets in India through the portfolio investment scheme (PIS). Under this scheme,
FIIs/NRIs can acquire shares/debentures of Indian companies through the stock
exchanges in India.
The ceiling for overall investment for FIIs is 24% of the paid up capital of the
Indian company and 10% for NRIs/PSOs. The limit is 20% of the paid up capital in the
case of public sector banks, including the State Bank of India.
The ceiling of 24% for FII investment can be raised up to sectoral cap/statutory
ceiling, subject to the approval of the board and the general body for the company
passing a special resolution to that effect. And the ceiling of 10% for NRIs/PIOs can be
raised to 24% subject to the approval of the general body of the company passing a
resolution to that effect.
The ceiling for FIIs is independent of the ceiling of 10/24 percent of NRIs/PIOs.
The equity shares and convertible debentures of the companies with in the prescribed
ceilings are available for purchase under PIS subject to:
The total purchase of all NRIs/PIOs both, on repatriation and non-repatriation

basis, being with in an overall ceiling limit of (a) 24 percent of the company’s total paid
up equity capital and (b) 24 percent of the total paid up value of each series of convertible
debenture; and
The investment made on repatriation basis by any single NRI/PIO in the equity
shares and convertible debentures not exceeding five percent of the paid up equity capital
of the company of five percent of the total paid up value of each series of convertible
debentures issued by the company.
Monitoring Foreign Investments
The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in

Indian companies on a daily basis. For effective monitoring of foreign investment ceiling
limits, the Reserve Bank has fixed cut-off points that are two percentage points lower
than the actual ceilings. The cut-off point, for instance, is fixed at 8 percent of companies
in which NRIs/PIOs can invest up to 10 percent of the company’s paid up capital. The
cut-off limit for companies with 24 percent ceiling is 22 percent and for companies with
30 percent ceiling, is 28 percent and so on. Similarly, the cut-off limit for public sector
banks (including state Bank of India) is 18 percent.
Once the aggregate net purchases of equity shares of the company by

FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve
Bank cautions all designated bank branches so as not to purchase any more equity shares
of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the
Reserve Bank. The link offices are then required to intimate the Reserve Bank about the
total number and value of equity shares/convertible debentures of the company they
propose to buy on behalf of FIIs/NRIs/PIOs.
On receipt of such proposals, the Reserve Bank gives clearances on a first-come-

first served basis till such investments in companies reach 10/24/30/40/49 percent limit
the sectoral caps/statutory ceiling as applicable. On reaching the aggregate ceiling limit,
the Reserve Bank advises all designated bank branches to stop purchases on behalf of
their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the
‘caution’ and the ‘stop purchase’ in these companies through a press release.
Few Examples of companies in which FII investment has been
made at different investment ceilings:
Companies where NRI investment has already reached 10% and no further
purchases can be allowed
1. DSQ Biotech Ltd
2. Global Trust Bank Ltd.
3. Madras Alluminium Co. Ltd
4. SPL Ltd
5. Seirra Optima Ltd
6. The Baroda Rayon Corp
7. Tai Industries Ltd.
Companies where NRI investment has reached 8% and further purchases are
allowed only with prior approval RBI
1. Astra IDL Ltd.
2. M/s. Codura Exports Ltd.
3. IDL Industries Ltd.
4. Nexus Software Ltd.
5. Dalmia Cement (Bharat) Ltd.
Companies in which NRIs/PIOs investment is allowed up to 24% of their Paid-up

Capital
1 Alembic Chemical Works Co. Ltd

2 Amar Investments Ltd, Calcutta.
3 Anglo-India Jute Mills Co.Ltd.
4 Arvind Mills, Ahmedabad
5 Ashima Syntex Ltd, Ahmedabad
6 Ashoka Viniyoga Ltd.
7 Bharat Nidhi Ltd.
8 BLB Shares & Financial Services Ltd
9 BPL Ltd
10 Burr Brown (India) Ltd
11 Camac Commercial Company Ltd.
12 Ceenik Exports (India) Ltd.
13 Cifco Finance Ltd. Mumbai
14 Classic Financial Services & Enterprises Ltd, Calcutta
15 CPPL Ltd,(Reliance Ind. Infrastructure Ltd), Mumbai
16 CRISIL
17 DCM Shriram Consolidated Ltd.
18 Dharani Sugars & Chemicals Ltd.
19 Dolphin Offshore Enterprises (I) Ltd
20 Essar Oil Ltd.
35 Jagatjit Industries Ltd, New Delhi
36 Jai Parabolic Springs Ltd, New Delhi
37 Jaysynth Dyechem Ltd.
38 Jindal Strips Ltd.
39 Jindal Iron & Steel Co.Ltd.
40 JJ Spectrum Silk Ltd
41 Kartjikeya Paper & Boards Ltd.
42 Lakhani India Ltd.
43 Matsushita Television And Audio India Ltd
44 M.P.Agro Fertilisers Ltd. Bhopal
45 Macleod Russel (I) Ltd.
46 Mazda Enterprises Ltd.Mumbai
47 Media Video Ltd
48 Multimetals Ltd, Mumbai
49 National Steel Industries Ltd
50 Nicholas Laboratories India Ltd, Mumbai
51 O.P. Electronics Ltd, Mumbai
52 Oriental Housing Development Finance Corp Ltd
53 Padmini Technologies Ltd.
54 Panacea Biotech Ltd.
55 Pearl Polymers Ltd, New Delhi
56 Piramal Healthcare Ltd.
57 PNB Finance & Industries Ltd
58 Rajath Leasing & Finance Ltd.
59 Rama Petrochemicals Ltd.
60 Rama Phosphates Ltd.
1) Companies in which FII Investment is allowed up till 30% of their

paid up capital :-
1. Aptech Ltd.
2. Asian Paints (India) Ltd
3. Capital Trust Ltd
4. Container Corporation of India
5. Ferro Alloys Corporation Ltd
6. Garware Polyester Ltd.
7. GIVO Ltd (formerly KB&T Ltd)
8. Gujarat Ambuja Cements Ltd.
9. Infotech Enterprises Ltd.
10. Mastek Ltd.
11. Orchid Chemicals and Pharmaceuticals Ltd
12. Pentasoft Technologies Ltd (Pentafour Communications Ltd.)
13. Polyplex Corporation Ltd
14. Ranbaxy Laboratories Ltd
15. Software Solutions Integrated Ltd
16. Sonata Software Ltd
17. The Credit Rating Information Services of India Ltd.
18. The Paper Products Ltd
19. Vikas WSP Ltd.
2) Companies in which FII Investment is allowed up to 40% of

their paid up capial :-
1. Balaji Telefilms Ltd.
2. M/s. Burr Brown (India) Ltd.
3. M/s. Elbee Services Ltd.
4. Hero Honda Motors Ltd.
5. Jyoti Structures Ltd.

6. Maars Software International Ltd.
7. Padmini Technologies Ltd.
8. Pentamedia Graphics Ltd.
9. Thiru Arooran Sugars Ltd.
10. UTV Software Ltd.
11. VisualSoft Technologies Ltd.
12. M/s. Silverline Technologies Ltd.
13. Ways India Ltd
3) Companies in which FII Investment is allowed up to 49% of their

paid up capital :-
1. Blue Dart Express Ltd
2. CRISIL
3. HDFC Bank Ltd
4. Hindustan Lever Ltd
5. Himachal Futuristic Communications Ltd
6. Infosys Technologies Ltd.
7. NIIT Ltd.
8. Dr. Reddy's Laboratories
9. Panacea Biotec Ltd.
10. Reliance Industries Ltd.
11. Reliance Petroleum Ltd.
12. Sofia Software Ltd
13. Sun Pharmaceutical Industries Ltd
14. United Breweries Ltd.

15. United Breweries (Holdings) Ltd.
16. Zee Telefilms Ltd.
Companies in which NRI/FII Investment is allowed upto 49% of their paid up

capital
1. ICICI Bank Ltd.
Companies in which FII Investment is allowed upto sectoral cap/statutory ceiling of

their paid up capital
1. GTL Ltd. - (74%)
2. Housing Development Finance Corporation Ltd. - (74%)
3. Infosys Technologies Ltd. - (100%)
4. Pentamedia Graphics Ltd. - (100%)
5. Pentasoft Technologies Ltd. - (100%)
6. Mascon Global Ltd. - (100%)
7. Punjab Tractors Ltd. - (64%)
8. Satyam Computer Services Ltd - (60%)
Companies where 22% FII investment limit has been reached and further
purchases are allowed with prior approval of RBI
1. ACC Ltd.
2. Digital Global Soft Ltd.
Financial instruments are available for FII investments:
* Securities in primary and secondary markets including shares, debentures and

warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in
India.
* Units of mutual funds;

* Dated Government Securities;
* Derivatives traded on a recognized stock exchange;
* Commercial papers.
FIIs importance for Indian Markets:-
FIIs are among the major sources of liquidity for the Indian markets. If FIIs are
investing huge amounts in the Indian stock exchanges then it reflects their high
confidence and a healthy investor sentiment for our markets. But with the current global
financial turmoil and a liquidity and credit freeze in the international markets, FIIs have
become net sellers (on a day to day basis). The entry or FIIs in India has brought mixed
consequences for our markets, on one hand they have improved the breadth and depth of
Indian markets and on the other hand they have also become the major sources of
speculation in testing times like these.
Foreign Institutional Investment in India
India opened its stock market to foreign investors in September 1992 and has,
since 1993, received portfolio investment from foreigners in the from of foreign
institutional investment in equities. This has become one of the main channels of FII in
India for foreigners. In order to trade in Indian equity market foreign corporations need to
register with SEBI as Foreign Institutional Investor (FII). India allows only authorized
foreign investors who are referred to as FII’s which include pension funds, investment
trusts, asset management companies, university funds, endowments, foundation,
charitable interests and charitable societies that have a track record of five years and
which are registered with a statutory authority in their own country of incorporation or
settlement. It is possible for foreigners to trade in Indian securities without registering as
an FII but such cases require approval from the RBI or the Foreign Investment Promotion
Board. FIIs generally concentrate in secondary market. The total amount of foreign
institutional investment in India has accumulated to formidable sum of over US $
11464.64 Million by the end of November 2002.
Data Description and Methodology for Variable Construction
To test the hypothesis entailed in the last section, we require data for returns, risk
and inflation in domestic and foreign economy, and data on FII flowing into domestic
economy (India). US is chosen as the foreign country to model FII inflow in India,
because US is our trade partner and accounts for the largest proportion of FII following
to India. (42 percent)3. Hence US could safely be used as proxy for rest of the world, to
Study prices, (Return = logPt-logPt12). Composite BSE Sensex is used for Indian stock
prices and S& P 500 is used for US stock prices. This study uses Standard & Poor’s 500
Index because it is usually considered as the benchmark for U.S equity performance. It
represents 70% of all U.S. publicly traded companies. Part of the index’s popularity is
due to its close association with the largest mutual fund in the world, the Vanguard 500
Index Fund, and Spiders, the first exchange traded fund. The listed companies are highly
diverse, spanning every relevant portion of the U.S. economy. The S&P 500 index also
tends to be the default when people discuss “index funds,” since index funds based on
other indexes were not widely available until recently.
To capture risk, monthly standard deviations are computed from daily returns on
composite BSE Sensex and S&P 500. We Would use ex ante risk rather than realized
risk, because realized risk represents a combination of ex ante risk and unexpected risk.
While FII may exhibit a negative relationship with predicted risk, its relationship with
unanticipated standard deviation could be positive. Since the relative importance of ex
ante risk and unexpected risk could vary overtime, one may get obscure relationship
between FII and realized risk. Wholesale Price Index is used to calculate year-on-year
inflation in India and Producer Price index is used to calculated inflation in US.
Monthly data has been used from January 1994 to November 2002. First year (1993) is
considered as learning period for foreign investors and hence an outlier, so it is not
included in the estimate.
2.3 : What is the Indian Rupee (INR)?
The Indian Rupee is the original official currency of India. The English
translation of “Rupee” is “Silver,” and the name exists because it was previously a silver
coin. This very fact had severe consequences in the 19th century, when the strongest
economies in the world were on the gold standard. The discovery of vast quantities of
silver in the U.S. and various European colonies resulted in a decline in the relative value
of silver to gold. Suddenly, the standard currency of Indian could not buy as much from
the outside world. Such circumstances led to what is now referred to as “the fall of the
Rupee.”
During the period 1950-1951 until mid-December 1973, India followed an

exchange rate regime with the Rupee linked to the pound sterling, except for the
devaluations in 1966 and 1971. When the pound sterling floated on June 23,1972 the
Rupees link to the British unit was maintained-thus, paralleling the Pound’s depreciation
and de facto devaluation.
In 1975, the Rupee’s ties to the Pound Sterling were disengaged. India established
a float exchange regime, with the Rupee’s effective rate placed on a controlled, floating
basis and linked to a ‘’basket of currencies” of India’s major trading partners. More
recently, the Indian Rupee has been depreciating in step formation, but roughly in line
with the fall in its Purchasing Power Parity since the early 1980s. While the PPP was 15
around 1982, the actual exchange rate was 9.30 per US dollar. After the devaluation, the
Rupee underwent the change from a controlled regime to a “Managed” or “Dirty” float
regime, where the market supposedly determines the exchange rate. In mid 2005, the
actual rate was near 43.60.
Sovereign credit ratings play an important part in determining a country’s access
to international capital markets, and the terms of that access. Sovereign ratings help to
foster dramatic growth, stability, and efficiency of international and domestic.
Latest Symbol of Indian National Rupee
D. Udaya Kumar
Research Scholar of Indian Rupee symbol
IIT Bombay
What does it look like?
Old and New Indian Coins
Political Structure
India is a federal republic with a parliamentary from of government. The

Parliament consists of a bicameral national legislature, with the Rajya Sabha (Council of
States) containing 250 members and the Lok Sabha (House of the People) with 545
members. India is a Union of 28 States and seven centrally administered union territory
Prominent Figures
The President of India is SMT. PRATIBHA DEVISINGH PATAL. The Prime

Minister of India is Manmohan Singh, who assumed the position on may 22, 2004. The
Reserve Bank of India is the central bank of India, and it controls the issurance of
currency throughout the nation.
Unique Characteristics
The INR is being pushed by India’s strong growth rate and speculation that there
may be an imminent adjustment to China’s FX regime. In addition, India’s trade deficit
has experienced record highs in 2005and 2006.
Throughout 2005, the Reserve Bank of India’s has seemed to be apathetic to the
overvaluation of the Rupee. This apathy is letting devices work toward their ends, as an
overvalued Rupee is helping to maintain a balance between inflation and growth. An
overvalued currency in an environment of high imported prices, can moderate
inflationary pressures. Once the inflation rate returns to more tolerable levels, the
overvaluation concerns will once again get back into focus.
Key Economic Factors
Consumer Price Index :
The CPI is used to measure inflation by computing changes in prices of products

consumed by households. In India, prices are susceptible to rapid increases. Consumers
are not immune to these price hikes, as wholesalers have a strong ability to pass the raise
in price raise in price along.
Gross Domestic Product :
The Central Statistical Office of India recently started using data reporting
standards of the International Monetary Fund (IMF), reporting the GDP in early quarters
of the late 1990s. The GDP measures the total production and consumption of goods and
services in India. It is necessary to look at changes in real GDP growth in India’s primary
industries, which include agriculture, manufacturing, trade, hotels, transport and
communication.
Industrial Production :
The index of Industrial Production (IIP) is a monthly composite of the value of

industrial production in various sectors of industrial sectors of the economy. The current
IIP includes the mining, manufacturing and electricity industries, each with different
weights. The mining and utility industries in India are especially worth watch in.
2.4 : INDIAN FOREIGN EXCHANGE MARKET :
A HISTORICAL PERSPECTIVE
Early Stages : (1947-1977)
The evolution of India’s foreign exchange market may be viewed in line with the
shifts in India’s exchange rate policies over the last few decades from a par value system
to a basket-peg and further to a managed float exchange rate system. During the period
from 1947 to 1971, India followed the per value system of exchange rate. Initially the
rupee’s external per value was fixed at 4.15 grains of fine gold. The Reserve Bank
maintained the per value of the rupee within the permitted margin of =1 percent using
pound sterling as the intervention currency. Since the sterling dollar exchange rate was
kept stable by the US monetary authority, the exchange rates of rupee in terms of gold as
well as the dollar and other currencies were indirectly kept stable. The devaluation of
rupee in September 1949 and June 1966 in terms of gold resulted in the reduction of the
per value or rupee in terms of gold to 2.88 and 1.83 grains of fine gold, respectively. The
exchange rate of the rupee remained unchanged between 1966 and 1971.
Given the fixed exchanged regime during this period, the foreign exchange
market for all practical purpose was defunct. Bank were required to undertake only cover
operations and maintain a ‘square’ or ‘near square’ position at all times. The objective of
exchange controls was primarily to regulate the demand for foreign exchange for various
purposes, within the limit set by the available supply. The Foreign Exchange Regulation
Act initially enacted in 1947 was placed on a permanent basis in 1957. In terms of the
provisions of the Act, the Reserve Bank, and in certain cases, the central Government
controlled and regulated the dealings in foreign exchange payments outside India, export
and import of currency notes and bullion, transfers of securities between residents and
non-residents, acquisition of foreign securities, etc.
With the breakdown of the Bretton Woods System in 1971 and the floatation of
major currencies, the conduct of exchange rate policy posed a serious challenge to all
central banks world wide as currency fluctuations opened up tremendous opportunities
for market players to trade in currencies in a borderless market. In December 1971, the
rupee was linked with pound sterling. Since sterling was fixed in terms of US dollar
under the Smithsonian Agreement of 1971, the rupee also remained stable against dollar.
In order to overcome the weaknesses associated with a single currency peg and to ensure
stability of the exchange rate, the rupee, with effect from September 1975, was pegged to
a basket of currencies. The currency selection and weights assigned were left to the
discretion of the Reserve Bank. The currencies included in the basket as well as their
relative weights were kept confidential in order to discourage speculation. It was around
this time that banks in India became interested in trading in foreign exchange.
Formative Period : (1978 – 1992)
The impetus to trading in the foreign exchange market in India came in 1978
when banks in India were allowed by the Reserve Bank to undertake intra-day trading in
foreign exchange and were required to comply with the stipulation of maintaining
‘square’ or ‘near square’ position only at the close of business hours each day. The extent
of position which could be left uncovered overnight (the open position) as well as the
limits up to which dealers could trade during the day were to be decided by the
management of banks. The exchange rate of the rupee during this period was officially
determined by the Reserve Bank of its buying and selling rates to the Authorized Dealers
(Ads) for undertaking merchant transactions. The spread between the buying and the
selling rates was 0.5 percent and the market began to trade actively within this range. Ads
were also permitted to trade in cross currencies (one convertible foreign currency versus
another). However, no ‘position’ in this regard could originate in overseas markets.
As opportunities to make profits began to emerge, major banks in India started

quoting two-way prices against the rupee as well as in cross currencies and, gradually,
trading volumes began to increase. This led to the adoption of widely different practices
(some of them being irregular) and the need was felt for a comprehensive set of
guidelines for operation of banks engaged in foreign exchange business. Accordingly, the
‘Guidelines for Internal Control over Foreign Exchange Business,’ were framed of
adoption by the bank in 1981. The foreign exchange market in India till the early 1990s,
however, remained highly regulated with restrictions on external transactions, barriers to
entry, low liquidity and high transaction costs. The exchanges rate during this period was
managed mainly for facilitating India’s imports. The strict control on foreign exchange
transactions through the Foreign Exchange Regulations Act (FERA) had resulted in one
of the largest and most efficient parallel markets for foreign exchange in the world, i.e.,
the hawala (unofficial) market.
By the late 1980s and the early 1990s, it was recognized that both macroeconomic
policy and structural factors had contributed to balance of payments difficulties.
Devaluation by India’s competitors had aggravated the situation. Although exports had
recorded a higher growth during the second half of the 1980s (from about 4.3 percent of
GDP in 1987-88 to about 5.8 percent of GDP in 1990-91), trade imbalances persisted at
around 3 percent of GDP. This combined with a precipitous fall in invisible receipt in the
form of private remittances, travel and tourism earnings in the year 1990-91 led to further
widening of current account deficit. The weaknesses in the external sector were
accentuated by the Gulf crisis of 1990-91. As a result, the current account deficit widened
to 3.2 percent of GDP 1990-91 and the capital flows also dried up necessitating the
adoption of exceptional corrective steps. It was against this backdrop that India embarked
on stabilization and structural reforms in the early 1990s.
Post-Reform Period : 1992 onwards
This phase was marked by wide ranging reform measures aimed at widening and
deepening the foreign exchange market and liberalization of exchange control regimes. A
credible macroeconomic, structural and stabilization programme encompassing trade,
industry, foreign investment, exchange rate, public finance and the financial sector was
put in place creating an environment conducive for the expansion of trade and
investment. It was recognized that trade policies, exchange rate policies and industrial
policies should from part of an integrated policy framework to improve the overall
productivity, competitiveness and efficiency of the economic system, in general and the
external sector, in particular.
As a stabilsation measure, a two step downward exchange rate adjustment by 9

percent and 11 percent between July 1and 3, 1991 was resorted to counter the massive
drawdown in the foreign exchange reserves, to instill confidence among investors and to
improve domestic competitiveness. A two-step adjustment of exchange rate in July 1991
effectively brought to close the regime of a pegged exchange rate. After the Gulf crisis in
1990-91, the broad framework for reforms in the external sector was laid out in the
Report of the High Level Committee on Balance of Payments (Chairman: Dr. C.
Rangarajan). Following the recommendations of the Committee to move towards the
market-determined exchange rate, the liberalized Exchange Rate Management System
(LERMS) was put in place in March 1992 initially involving a dual exchange rate
system. Under the LERMS, all foreign exchange receipts on current account transactions
(exports, remittances, etc.) were required to be surrendered to the Authorized Dealers
(Ads) in full. The rate of exchange for conversion of 60 percent of the proceeds of these
transactions was the market rate quoted by the ADs, while the remaining 40 percent of
the proceeds were converted at the Reserve Bank’s official rate. The ADs, in turn, were
required to surrender these 40 percent of their purchase of foreign currencies to the
Reserve Bank. They were free to retain the balance 60 percent of foreign exchange for
selling in the free market for permissible transactions. The LERMS was essentially a
transitional mechanism and a downward adjustment in the official exchange rate took
place in early December 1992 and ultimate convergence of the dual rates was made
effective from March 1, 1993, leading to the introduction of a market-determined
exchange rate regime.
The dual exchange rate system was replaced by a unified exchange rate system in
March 1993, whereby all foreign exchange receipts could be converted at market
determined exchange rates. On unification of the exchange rates, the nominal exchange
rate of the rupee against both the US dollar as also against a basket of currencies got
adjusted lower, which almost nullified the impact of the previous inflation differential.
The restrictions on a number of other current account transactions were relaxed. The
unification of the exchange rate of the Indian rupee was an important step towards current
account convertibility, which was finally achieved in August 1994, when India accepted
obligations under Article VIII of the Articles of Agreement of the IMF
With the rupee becoming fully convertible on all current account transactions, the
risk-bearing capacity of banks increased and foreign exchange trading volumes started
rising. This was supplemented by wide-ranging reforms undertaken by the Reserve Bank
in conjunction with the Government to remove market distortions and deepen the foreign
exchange market. The process has been marked by ‘gradualism’ with measures being
undertaken after extensive consultations with experts and market participants. The reform
phase began with the Sodhani Committee (1994) which in its report submitted in 1995
made several recommendations to relax the regulations with a view to vitalizing the
foreign exchange market.
Recommendations of the Expert Group on Foreign Exchange Markets

In India
The Expert Group on Foreign Exchange Markets in India (Chairman : Shri O.P.
Sodhani), which submitted its Report in 1995, identified various regulations inhibiting
the growth of the market. The Group recommended that the corporate may be
recommended that banks should be permitted to fix their own exchange position limits
such as intra-day and overnight limits, subject to ensuring that the capital is provided
marked to the extent of 5 percent of this limit based on internationally accepted
guidelines. The Group also favored fixation of Aggregate Gap Limit (AGL), which
would also include rupee transactions, by the managements of the banks based on capital
risk taking capacity, etc. It recommended that banks be allowed to initiate cross currency
positions abroad and to lend or borrow short-term funds up to six months, subject to a
specified ceiling. Another important suggestion related to allowing exporters to retain
100 percent of their export earnings in any foreign currency with an Authorized Dealer
(AD) in India, subject to liquidation of outstanding advances against export bills. The
Group was also in favor of permitting ADs to determined the interest rates and maturity
period in respect of FCNR (B) deposits. It recommended selective intervention by the
Reserve Bank in the market so as to ensure greater orderliness in the market.
In addition, the Group recommended various other short-term and long-term

measures to activate and facilitate functioning of markets and promoted the development
of a vibrant derivative market. Short-term measures recommended included exemption of
domestic inter-bank borrowings from SLR/CRR requirements to facilitate development
of the term money market, cancellation and re-booking of currency options, permission to
offer lower cost option strategies such as the ‘range forward’ and ‘ratio range forward’
and permitting ADs to offer any derivative products on a fully covered basis which can
be freely used for their own asset liability management.
As part of long-term measures, the Group suggested that the Reserve Bank should
invite detailed proposals from banks for offering rupee-based derivatives, should refocus
exchange control regulation and guidelines on risks rather than on products and frame a
fresh set of guidelines for foreign exchange and derivatives risk management.
As regards accounting and disclosure standards, the main recommendations included
reviewing of policy procedures and transactions on an on-going basis by a risk control
team independent of dealing and settlement functions, ensuring fo uniform
documentation and market practices by the Foreign Exchange Dealers’ Association of
India (FEDAI) or any other body and development of accounting disclosure standard.
Most of the recommendations of the Sodhani Committee relating to the

development of the foreign exchange market were implemented during the latter half of
the 1990s.
In addition several initiatives aimed at dismantling controls and providing and

enabling environment to all entities engaged in foreign exchange transactions have been
undertaken since the mid-1990s. The focus has been on developing the institutional
framework and increasing the instruments for effective functioning, enhancing
transparency and liberalizing the conduct of foreign exchange business so as to move
away from micro management of foreign exchange transactions to macro management of
foreign exchange flows (Box VI.3).
An Internal Technical Group on the Foreign Exchange Markets (2005) set up by

the Reserve Bank made various recommendations for further liberalization of the extant
regulations. Some of the recommendations such as freedom to cancel and rebook forward
contracts of any tenor, delegation of powers to ADs for grant of permission to corporates
to hedge their exposure to commodity price risk in the international commodity
exchanges/markets and extension of the trading hours of the inter-bank foreign exchange
market have since been implemented.
Along with these specific measures aimed at developing the foreign exchange
market, measures towards liberalizing the capital account were also implemented during
the last decade, guided to a large extent since 1997 by the Report of the Committee on
Capital Account Convertibility (Chairman : Shri S.S. Tarapore). Various reform
measures since the early 1990s have had a profound effect on the market structure, depth,
liquidity and efficiency of the Indian foreign exchange market as detailed in the
following section.
Measures Initiated to Develop the Foreign Exchange Market in India
Institutional Framework.
The Foreign Exchange Regulation Act (FERA),1973 was replaced by the market
friendly Foreign Exchange Management Act (FEMA), 1999. The Reserve Bank
delegated powers to authorized dealers (ADs) to release foreign exchange for a variety of
purposes.
* In pursuance of the Siobhan Committee’s recommendations, the Clearing

Corporation of India Limited (CCIL) was set up in 2001.
* To further the participatory process in a more holistic manner by taking into

account all segments of the financial markets, the ambit of the Technical Advisory
Committee (TAC) on Money and Securities Markets set up by the Reserve Bank in 1999
was expanded in 2004 to include foreign exchange markets and the Committee was
rechristened as TAC on Money, Government Securities and Foreign Exchange Markets
Increase in Instruments in the Foreign Exchange Market.
* The rupee-foreign currency swap market was allowed
* Additional hedging instruments such as foreign currency-rupee options, cross-

currency options, interest rate swaps (IRS) and currency swaps, caps/collars and forward
rate agreements (FRAs) were intrduced.
2.5 Introduction of Volatility
In finance, volatility most frequently refers to the standard deviation of the

continuously compounded returns of a financial instrument within a specific time
horizon. It is common for discussions to talk about the volatility of a security's price,
even while it is the returns' volatility that is being measured. It is used to quantify the risk
of the financial instrument over the specified time period.
Volatility as described here refers to the actual current volatility of a financial

instrument for a specified period (for example 30 days or 90 days). It is the volatility of a
financial instrument based on historical prices over the specified period with the last
observation the most recent price. This phrase is used particularly when it is wished to
distinguish between the actual current volatility of an instrument and
 actual historical volatility which refers to the volatility of a financial instrument

over a specified period but with the last observation on a date in the past
 actual future volatility which refers to the volatility of a financial instrument
over a specified period starting at the current time and ending at a future date
(normally the expiry date of an option)
 historical implied volatility which refers to the implied volatility observed from
historical prices of the financial instrument (normally options)
 current implied volatility which refers to the implied volatility observed from
current prices of the financial instrument
 future implied volatility which refers to the implied volatility observed from
future prices of the financial instrument

Volatility vs. Direction

Volatility does not measure the direction of price changes, merely their dispersion. This
is because when calculating standard deviation (or variance), all differences are squared,
so that negative and positive differences are combined into one quantity. Two
instruments with different volatilities may have the same expected return, but the
instrument with higher volatility will have larger swings in values over a given period of
time.
For example, a lower volatility stock may have an expected (average) return of 7%, with
annual volatility of 5%. This would indicate returns from approximately -3% to 17%
most of the time (19 times out of 20, or 95%). A higher volatility stock, with the same
expected return of 7% but with annual volatility of 20%, would indicate returns from
approximately -33% to 47% most of the time (19 times out of 20, or 95%)
Chapter No.3
OBJECTIVE OF THE
STUDY
OBJECTIVE OF THE STUDY
 To analyze the impact of the investment made by FIIs on exchange rate of Indian
rupee.
 To study the scope and trading mechanism of Foreign Institutional investors in

India.
 Impact can be seen in term of volatility of the exchange rate.
 To find the relationship between the FIIs equity investment pattern and Exchange
rates.
 Volatility of the exchange rate denotes to the ups& down in the exchange rate due
to fluctuation of the FIIs.
 Volatility of the exchange rate is an unavoidable situation which is bound to

happen over a period of time.
 Calculate the volatility in term of standard deviation.

Chapter No.4
SCOPE & NEED OF

STUDY
SCOPE AND NEED OF STUDY
Scope of the study is very broader and covers the impact of foreign institutional investors
on exchange rates . But, study is only going to cover Net foreign investments and
exchange rates in form of equity. The time period is taken from financial year beginning
to ending i.e.April 2003 to March 2010 as it will give exact impact in both the bullish
and bearish trend.
The study will provide a very clear picture of the impact of foreign institutional investors
on Exchange rates. It will also describe the market trends due to FIIs inflow and outflow.
The study would be helpful for further descriptive studies on the ideas that will be
explored. Moreover, it would be beneficial to gain knowledge regarding foreign
institutional investments, their process of registration and their impact of foreign
institutional investors on exchange rates and value of Indian national rupee in terms of
volatility.
Chapter No.5
RESEARCH
METHODOLOGY
RESEARCH METHODOLOGY
5.1: PROBLEM DEFINITION
To analyze the impact of investment made by Foreign Institutional Investors (FII)

on the Exchange rate of Indian Rupee. FII make investment India what is its effect on
Exchange Rate it can be increase or decrease.
5.2: RESEARCH DESIGN
Research Design is the plan structure and strategy of investigation conceived so as

to obtain answers to research problems. It is specification of methods and procedures for
acquiring the information needed.
In this project Causal Research Design has been used to analyze the cause and
effect relationship between the variables.
Causal research design is applied to find out the impact of independent variable
investment made by FII on various dependent variables related to Exchange rate of
Indian rupee.
These dependent variables include:
 Closing values of Exchange rate
 Volatility i.e., Standard Deviation

Exploratory Research
As an exploratory study is conducted with an objective to gain familiarity with the

phenomenon or to achieve new insight into it, this study aims to find the new insights in
terms of finding the relationship between FII’S and Exchange Rates.
SAMPLING DESIGN
• Universe
In this study the universe is finite and will take into the consideration related news and
events that have happened in last few year.
• Sampling Unit: -
As this study revolves around the foreign institutional investment and Exchange Rates.
So for the sampling unit is confined for the both i.e. Net Foreign Investment & Exchange
Rates.
SAMPLING TECHNIQUE
Convenient Sampling:- Study conducted on the basis of availability of the Data and
requirement of the project. Study requires the events that have impact foreign institution
investors on exchange rates.
RESEARCH ANALYSIS TOOLS
Regression analysis and Correlation analysis:
Regression Analysis: We can analyze that the net investment by FII is a dependant
variable and the Exchange Rate is an independent variable.— for example, impact of FII
investment on the Indian exchange rate can be observed by change in the FII investment
then it can be affect the Exchange rate.
Correlation: This analysis tool and its formulas measure the relationship between two
data sets that are scaled to be independent of the unit of measurement. The variable
correlation calculation returns the covariance of two data sets divided by the product of
their standard deviations. We can use the Correlation tool to determine whether two
ranges of data move together — that is, whether large values of one set are associated
with large values of the other (positive correlation), whether small values of one set are
associated with large values of the other (negative correlation), or whether values in both
sets are unrelated (correlation near zero).
5.3: DATA COLLECTION:
The Secondary sources have been used for the collection of the data used in the research.
Secondary Data:
Secondary data may be defined as the data that has been collected earlier for some
purpose other than the purpose of the present study. Any data that is available prior to the
commencement of the research project is secondary data, and therefore secondary data is
also called as the historical data.
Secondary data sources provide a wealth of information to the researcher. It often

obviates the need of the primary data collection and saves valuable time, effort and
money. Even where subsequent primary data collection is required an analysis of
secondary data enlightens the researcher regarding many aspect of the study and gives
contextual familiarity for primary data collection. It thus provides rich insights into the
research process.As there are not possibilities of collecting data personally so no
questionnaire is made.
SOURCES OF SECONDARY DATA:
Secondary Data
Published Sources Unpublished Sources
1. Census Report 1. Letters, Diaries

2. Planning Commission Reports 2. Biographies,
and statistics Autobiographies
3. Government Report 3. Accounting and inancial Records
4. Annual Report of 4. Personal Records
RBI, RBI Bulletin etc.
In this project, secondary data of the previous years (from year 2005 to 2010) has been
collected for the testing the hypothesis. The data required for the analysis of the impact of
FIIs on Exchange Rate dollar Vs INR are
1. Monthly net inflow of the FII investment from April 2003 to March 2010 (Rs.
in crore)
2. Monthly Exchange Rate dollar Vs INR from April 2003 to March2010
SAMPLE SIZE:
1. Monthly average closing of Exchange rate from April 2003 to March 2010 total 84
sample
2. Monthly average Net Inflow investment by FIIs from April 2003 to March 2010 total
84sample.
Chapter No.6
HYPOTHESIS
HYPOTHESIS
In this project we are trying to analyze the impact of the FII investment on the
Exchange rate of Indian rupee. Comparison between US Dollar Vs Indian Rupee. In
hypothesis it is assumed that there is a direct relation of FII investment (Net Flow from
FII) and the volatility of the exchange rate.
Hypothesis : 1
Ho(Null Hypothesis) : The net FII dollar inflow increases then the rupee value are
appreciates means the Exchange Rate decrease.
H1 (Alternate Hypothesis) : The net FII dollar inflow decreases then the rupee value
decrease means Exchange Rate appreciates.
Hypothesis : 2
Ho (Null Hypothesis) : The FII dollar inflow has increase the volatility of Exchange Rate
of dollar Vs rupee.
H1 (Alternate Hypothesis): The FII dollar inflow hasn’t increase the volatility of
Exchange Rate of dollar Vs rupee.
The Hypothesis can be tested using the Regression Equation and plotting the
regression line on the graph. The accuracy of the result will be dependent of Standard
Error associated with the calculation.
Chapter No.7
DATA
TABULATION
DATA TABULATION
For this study, historical monthly data of previous 7 years have been
tabulated.
Table 1 : Table containing the Net FII Inflow. It has been taken as the net position of the Net
Inflow of FII at the end of each month. All amounts are Rs. In Crore.
Table 2 : Table containing the data of Exchange Rate of Indian rupee. All the amounts in
rupees (All the values have been taken as the position at the end of each month).
Table : Net FII Investment (Monthly Position of Net FII Investment, From
1st April 2003 to 31st March 2010 total 84 data point)
Sr.NO Duration In Month FII Net Inflow (Rs. In Crore)
1 Apr-03 572.38
2 May-03 1232.95
3 Jun-03 2592.95
4 Jul-03 2495.89
5 Aug-03 2058.07
6 Sep-03 4047.69
7 Oct-03 6939.72
8 Nov-03 3282.39
9 Dec-03 6290.59
10 Jan-04 2492.86
11 Feb-04 3182.74
12 Mar-04 8811.80
13 Apr-04 4207.86
14 May-04 -3151.29
15 June-04 511.00
16 July-04 1292.83
17 Aug-04 2850.25
18 Sep-04 2815.61
19 Oct-04 3952.04
20 Nov-04 6344.57
21 Dec-04 5890.00
22 Jan-05 1324.24
23 Feb-05 7493.76
24 Mar-05 7885.58
25 Apr-05 -946.29
26 May-05 -586.82
27 Jun-05 5699.40
28 Jul-05 7390.55
29 Aug-05 4084.87
30 Sep-05 3258.00
31 Oct-05 -3808.31
32 Nov-05 4559.07
33 Dec-05 9615.32
34 Jan-06 5177.18
35 Feb-06 7859.26
36 Mar-06 6347.74
37 Apr-06 722.07
38 May-06 -8930.32
39 Jun-06 1781.87
40 Jul-06 1073.16
41 Aug-06 3998.05
42 Sep-06 4624.13
43 Oct-06 5805.01
44 Nov-06 7028.59
45 Dec-06 -1869.49
46 Jan-07 3184.86
47 Feb-07 4279.07
48 Mar-07 2057.05
49 Apr-07 4257.88
50 May-07 3242.17
51 Jun-07 7210.02
52 Jul-07 19515.29
53 Aug-07 -6476.32
54 Sep-07 19823.40
55 Oct-07 16375.64
56 Nov-07 -3052.11
57 Dec-07 5054.92
58 Jan-08 -13000.98
59 Feb-08 7784.26
60 Mar-08 1354.39
61 Apr-08 1475.95
62 May-08 -3378.41
63 June-08 -10429.39
64 July-08 -1653.81
65 Aug-08 -2808.24
66 Sep-08 -7548.91
67 Oct-08 -13461.39
68 Nov-08 -2607.45
69 Dec-08 2207.88
70 Jan-09 -3897.01
71 Feb-09 -1758.84
72 Mar-09 521.87
73 Apr-09 8122.99
74 May-09 21114.76
75 June-09 4331.55
76 July-09 11987.48
77 Aug-09 3847.28
78 Sep-09 20334.61
79 Oct-09 8558.21
80 Nov-09 5728.01
81 Dec-09 10600.75
82 Jan-10 -2435.27
83 Feb-10 2734.14
84 Mar-10 19976.61
 Graph 1 : Net FII Investment (Closing Investment of FII at
the end of every month 30th April 2003 to 30th Mar 2004 )
Graph 2 : Net FII Investment (Closing Investment of FII at the
end of every month 30th April 2004 to 30th Mar 2005 )
Graph 5: Net FII Investment (Closing Investment of FII at the
end of every month 30th April 2009 to 30st Mar 2010 )
Table 1: Exchange Rate (Monthly Position of Exchange Rate at the end of
every month, from 1st April 2003 to 31st March 2010)
Sr.NO Duration In Month Exchange Rate
1 Apr-03 47.3758
2 May-03 47.0816
3 Jun-03 46.7098
4 Jul-03 46.2300
5 Aug-03 45.9330
6 Sep-03 45.8471
7 Oct-03 45.3873
8 Nov-03 45.5221
9 Dec-03 45.5880
10 Jan-04 45.4557
11 Feb-04 45.2703
12 Mar-04 45.0179
13 Apr-04 43.9311
14 May-04 45.2508
15 June-04 45.5068
16 July-04 46.0416
17 Aug-04 46.3410
18 Sep-04 46.0950
19 Oct-04 45.7826
20 Nov-04 45.1251
21 Dec-04 43.9796
22 Jan-05 43.7545
23 Feb-05 43.6798
24 Mar-05 43.6905
25 Apr-05 43.7412
26 May-05 43.4889
27 Jun-05 43.5836
28 Jul-05 43.5361
29 Aug-05 43.6245
30 Sep-05 43.9150
31 Oct-05 44.8180
32 Nov-05 45.7265
33 Dec-05 45.6411
34 Jan-06 44.3970
35 Feb-06 44.3289
36 Mar-06 44.4810
37 Apr-06 44.9491
38 May-06 45.4073
39 Jun-06 46.0561
40 Jul-06 46.4562
41 Aug-06 46.5370
42 Sep-06 46.1181
43 Oct-06 45.4676
44 Nov-06 44.8507
45 Dec-06 44.6351
46 Jan-07 44.3325
47 Feb-07 44.1583
48 Mar-07 44.0260
49 Apr-07 42.1482
50 May-07 40.7814
51 Jun-07 40.7736
52 Jul-07 40.4139
53 Aug-07 40.8212
54 Sep-07 40.3400
55 Oct-07 39.5114
56 Nov-07 39.4364
57 Dec-07 39.4395
58 Jan-08 39.3737
59 Feb-08 39.7326
60 Mar-08 40.3561
61 Apr-08 40.0224
62 May-08 42.1250
63 June-08 42.8202
64 July-08 42.8308
65 Aug-08 42.9374
66 Sep-08 45.5635
67 Oct-08 48.6555
68 Nov-08 48.9994
69 Dec-08 48.6345
70 Jan-09 48.8338
71 Feb-09 49.2611
72 Mar-09 51.2287
73 Apr-09 50.0619
74 May-09 48.5330
75 June-09 47.7714
76 July-09 48.4783
77 Aug-09 48.3350
78 Sep-09 48.4389
79 Oct-09 46.7211
80 Nov-09 46.5673
81 Dec-09 46.6288
82 Jan-10 45.9598
83 Feb-10 46.3279
84 Mar-10 45.4965
Graph 1 : Exchange Rate (Exchange Rate at the end of every month from
30th April 2003 to 31st Mar 2004)
Chapter No.8
DATA
Interpretation &
Analysis
DATA INTERPRETATION AND ANALYSIS
Impact of FII Investment on the Indian Exchange rate can be observed by change in
the FII Investment then it can be affect the Exchange Rate. This impact can be statistically
represented through a regression line indicating the effect of net investment of FII on the
growth of the market capitalization
In this regression equation the net investment by FII is a dependent variable and the
Exchange Rate is an independent variable
Sr.No. Duration FII Investment Exchange Rate

($ Vs INR)
1 Apr-03 572.38 47.3758

2 May-03 1232.95 47.0816
3 Jun-03 2592.95 46.7098
4 Jul-03 2495.89 46.2300
5 Aug-03 2058.07 45.9330
6 Sep-03 4047.69 45.8471
7 Oct-03 6939.72 45.3873
8 Nov-03 3282.39 45.5221
9 Dec-03 6290.59 45.5880
10 Jan-04 2492.86 45.4557
11 Feb-04 3182.74 45.2703
12 Mar-04 8811.80 45.0179
13 Apr-04 4207.86 43.9311
14 May-04 -3151.29 45.2508
15 June-04 511.00 45.5068
16 July-04 1292.83 46.0416
17 Aug-04 2850.25 46.3410
18 Sep-04 2815.61 46.0950
19 Oct-04 3952.04 45.7826
20 Nov-04 6344.57 45.1251
21 Dec-04 5890.00 43.9796
22 Jan-05 1324.24 43.7545
23 Feb-05 7493.76 43.6798
24 Mar-05 7885.58 43.6905
25 Apr-05 -946.29 43.7412
26 May-05 -586.82 43.4889
27 Jun-05 5699.40 43.5836
28 Jul-05 7390.55 43.5361
29 Aug-05 4084.87 43.6245
30 Sep-05 3258.00 43.9150
31 Oct-05 -3808.31 44.8180
32 Nov-05 4559.07 45.7265
33 Dec-05 9615.32 45.6411
34 Jan-06 5177.18 44.3970
35 Feb-06 7859.26 44.3289
36 Mar-06 6347.74 44.4810
37 Apr-06 722.07 44.9491
38 May-06 -8930.32 45.4073
39 Jun-06 1781.87 46.0561
40 Jul-06 1073.16 46.4562
41 Aug-06 3998.05 46.5370
42 Sep-06 4624.13 46.1181
43 Oct-06 5805.01 45.4676
44 Nov-06 7028.59 44.8507
45 Dec-06 -1869.49 44.6351
46 Jan-07 3184.86 44.3325
47 Feb-07 4279.07 44.1583
48 Mar-07 2057.05 44.0260
49 Apr-07 4257.88 42.1482
50 May-07 3242.17 40.7814
51 Jun-07 7210.02 40.7736
52 Jul-07 19515.29 40.4139
53 Aug-07 -6476.32 40.8212
54 Sep-07 19823.40 40.3400
55 Oct-07 16375.64 39.5114
56 Nov-07 -3052.11 39.4364
57 Dec-07 5054.92 39.4395
58 Jan-08 -13000.98 39.3737
59 Feb-08 7784.26 39.7326
60 Mar-08 1354.39 40.3561
61 Apr-08 1475.95 40.0224
62 May-08 -3378.41 42.1250
63 June-08 -10429.39 42.8202
64 July-08 -1653.81 42.8308
65 Aug-08 -2808.24 42.9374
66 Sep-08 -7548.91 45.5635
67 Oct-08 -13461.39 48.6555
68 Nov-08 -2607.45 48.9994
69 Dec-08 2207.88 48.6345
70 Jan-09 -3897.01 48.8338
71 Feb-09 -1758.84 49.2611
72 Mar-09 521.87 51.2287
73 Apr-09 8122.99 50.0619
74 May-09 21114.76 48.5330
75 June-09 4331.55 47.7714
76 July-09 11987.48 48.4783
77 Aug-09 3847.28 48.3350
78 Sep-09 20334.61 48.4389
79 Oct-09 8558.21 46.7211
80 Nov-09 5728.01 46.5673
81 Dec-09 10600.75 46.6288
82 Jan-10 -2435.27 45.9598
83 Feb-10 2734.14 46.3279
84 Mar-10 19976.61 45.4965
The regression equation of Exchange Rate on the net inflow of FII can be given in the form
of
Y= a + b*X
To solve the above equation we need two more equation, given by:
∑ Y= N*a + b*∑ X and
∑ XY= a ∑X + b∑ X2
In the above equation, Y is exchange rate (Dependent Variable), X is Net FII Investment
(Independent Variable) and ‘a’ & ‘b’ are two constants which are known to be the
“intercept” and “slope” respectively.
With the help of the tabulated values we can construct a regression equation of Exchange
Rate on Net FII investment.
Y=0.576x-18992
a = 18992 is the intercept on Y axis & b= 0.576x is slope of the equation
By calculating the “Coefficient of Correlation” We can define the relationship of the two
variables Exchange Rate and Net inflow of FII.
Using the above tabulated values the coefficient of correlation is calculated to be ‘r’ = 0.063
which denotes the two variables having a very low positive relationship with each other.
The value of r2 = 0.004 or 0.40% that indicated the effect of the FII inflow has about 0.40%
effect on Exchange Rate.
The Graphical representation of the regression equation is given below:-
The above graphical presentation of the regression equation Y =0.576x-18992 axis

denotes the Net investment done by the FIIs and Y axis denotes the subsequent
Exchange Rate.
Calculation of Standard Deviation measuring the for volatility Year
April2003-March2010
Ass. Mean 45
Period Exchange Rate(X) X=(X-A.M) X2
Apr-03 47.3758 2.3758 5.6444
May-03 47.0816 2.0816 4.3330
Jun-03 46.7098 1.7098 2.9234
Jul-03 46.2300 1.2300 1.5129
Aug-03 45.9330 0.933 0.8705
Sep-03 45.8471 0.8471 0.7176
Oct-03 45.3873 0.3873 0.1500
Nov-03 45.5221 0.5221 0.2726
Dec-03 45.5880 0.5880 0.3457
Jan-04 45.4557 0.4557 0.2077
Feb-04 45.2703 0.2703 0.7306
Mar-04 45.0179 0.0179 0.0003
Apr-04 43.9311 -1.0689 1.1425
May-04 45.2508 0.2508 0.0629
June-04 45.5068 0.5068 0.2568
July-04 46.0416 1.0416 1.0849
Aug-04 46.3410 1.3410 1.7983
Sep-04 46.0950 1.0950 1.1990
Oct-04 45.7826 0.7826 0.6125
Nov-04 45.1251 0.1251 0.0157
Dec-04 43.9796 -1.0204 1.0412
Jan-05 43.7545 -1.2455 1.5513
Feb-05 43.6798 -1.3202 1.7429
Mar-05 43.6905 -1.3095 1.7148
Apr-05 43.7412 -1.2588 1.5846
May-05 43.4889 -1.5111 2.2834
Jun-05 43.5836 -1.4164 2.0062
Jul-05 43.5361 -1.4639 2.1430
Aug-05 43.6245 -1.3755 1.8920
Sep-05 43.9150 -1.085 1.1772
Oct-05 44.8180 -0.182 0.03312
Nov-05 45.7265 0.7265 0.5278
Dec-05 45.6411 0.6411 0.4110
Jan-06 44.3970 -0.603 0.3636
Feb-06 44.3289 -0.6711 0.4504
Mar-06 44.4810 -0.519 0.2694
Apr-06 44.9491 -0.0509 0.0026
May-06 45.4073 0.4073 0.1659
Jun-06 46.0561 1.0561 1.1153
Jul-06 46.4562 1.4562 2.1205
Aug-06 46.5370 1.5370 2.3624
Sep-06 46.1181 1.1181 1.2501
Oct-06 45.4676 0.4676 0.2186
Nov-06 44.8507 -0.1493 0.0223
Dec-06 44.6351 -0.3649 0.1332
Jan-07 44.3325 -0.6675 0.4456
Feb-07 44.1583 -0.8417 0.7085
Mar-07 44.0260 -0.974 0.9487
Apr-07 42.1482 -2.8518 8.1328
May-07 40.7814 -4.2186 17.7966
Jun-07 40.7736 -4.2264 17.8625
Jul-07 40.4139 -4.5861 21.0323
Aug-07 40.8212 -4.1788 17.4624
Sep-07 40.3400 -4.6600 21.7156
Oct-07 39.5114 -5.4886 30.1247
Nov-07 39.4364 -5.5636 30.9536
Dec-07 39.4395 -5.5605 30.9192
Jan-08 39.3737 -5.6263 31.6553
Feb-08 39.7326 -5.2674 27.7455
Mar-08 40.3561 -4.6439 21.5658
Apr-08 40.0224 -4.9776 24.7765
May-08 42.1250 -2.875 8.2656
June-08 42.8202 -2.1798 4.7515
July-08 42.8308 -2.1692 4.7054
Aug-08 42.9374 -2.0626 4.2543
Sep-08 45.5635 0.5635 0.3175
Oct-08 48.6555 3.6555 13.3627
Nov-08 48.9994 3.9994 15.9952
Dec-08 48.6345 3.6345 13.2096
Jan-09 48.8338 3.8338 14.6980
Feb-09 49.2611 4.2611 18.1570
Mar-09 51.2287 6.2287 38.7967
Apr-09 50.0619 5.0619 25.6228
May-09 48.5330 3.5330 12.4821
June-09 47.7714 2.7714 7.6806
July-09 48.4783 3.4783 12.0986
Aug-09 48.3350 3.3350 11.1222
Sep-09 48.4389 3.4389 11.8260
Oct-09 46.7211 1.7211 2.9622
Nov-09 46.5673 1.5673 2.4564
Dec-09 46.6288 1.6288 2.6530
Jan-10 45.9598 0.9598 0.9212
Feb-10 46.3279 1.3279 1.7633
Mar-10 45.4965 0.4965 0.2465
3769.233 -10.767 582.65812

The Mean Value of the index value is 44.872
Variance = ∑ x2 /n-1, where n is the sample size (84)
Standard Deviation (σ) = Variance
= 2.650
Calculation of Standard Deviation for measuring the volatility Year Apr1990-
March1992
Ass.Mean 28
Period Exchange Rate(X) X'=(X-A.M.) X'2
Apr-90 25.94 -2.06 4.2436
May-90 25.92 -2.08 403264
Jun-90 25.91 -2.09 4.3681
Jul-90 25.84 -2.16 4.6656
Aug-90 26.2 -1.8 3.24
Sep-90 26.3 -1.7 2.89
Oct-90 27.9 -0.1 0.01
Nov-90 28.7 0.7 0.49
Dec-90 29.1 1.1 1.21
Jan-91 29.12 1.12 1.2544
Feb-91 28.59 0.59 0.3481
Mar-91 28.22 0.22 0.0484
Apr-91 27.79 -0.21 0.0441
May-91 27.94 -0.06 0.0036
Jun-91 28.16 0.16 0.0256
Jul-91 29.01 1.01 1.0201
Aug-91 28.87 0.87 0.7569
Sep-91 29.21 1.21 1.4641
Oct-91 28.76 0.76 0.5776
Nov-91 28.56 0.56 0.3136
Dec-91 28.34 0.34 0.1156
Jan-92 28.57 0.57 0.3249
Feb-92 28.39 0.39 0.1521
Mar-92 28.67 0.67 0.4489
670.01 -1.99 32.3417
The Mean Value of the index value is 27.9170

Variance =Σ X'2/n-1, where n is the sample size (24)
Standard Deviation (σ) = √ Variance
= 1.186
Chapter No.9
HYPOTHESIS
TESTING
HYPOTHESIS TESTING
Hypothesis: 1
The hypothesis says that the net inflow of FII has appreciates the rupee value and
depreciates the Exchange Rate dollar Vs INR. The Appreciation of rupee can be measure by
calculating the regression line and coefficient of correlation of Net FII Inflow and the
Exchange Rate.
Calculation of Coefficient of Correlation
By calculating the “Coefficient of Correlation” we can define the relationship of the two
variables Exchange Rate and Net inflow of FII.
Using the above tabulated values the coefficient of correlation is calculated to be ‘r’ = 0.063
which denotes the two variables having a very low positive relationship with each other.
The value of r2 = 0.004 or 0.40% that indicate the effect of the FII inflow has about 0.40%
effect on Exchange Rate.
Hypothesis: 2
The hypothesis says that the inception of the investment of FII has increased the volatility of
the Exchange Rate. The volatility can be measured by calculating the Standard Deviations
(σ) of the Exchange Rate before the investment allowed to FIIs and after the investment
done by the same
Calculation of Standard Deviation :
For calculating the standard deviation of the Exchange Rate when there was no investment
made by the FIIs, we have taken the time period of April 1990 to March 1992, total of 24
month’s observations, FIIs were allowed to invest in the Indian capital market since the
financial year 1992-93 onwards.
The mean index value of the Exchange Rate was calculated to be at 27.9170 By using the
formula for calculating Standard Deviation (σ) we get the value to be 1.186 The mean index
value of Exchange Rate Since April 2003 to March 2010 is 44.872 and Standard deviation
(σ) is 2.650.
The difference of the standard deviations of Exchange Rate before FII started investment in
India and after FII started the investment in India is degree of effect on exchange rate.
Investment of FII is not the only indicator of the volatility of the Exchange Rate.
There are more reasons as well:
A country’s exchange rate is typically affected by the supply and demand for that country’s
currency in international exchange markets and this supply and demand affected by
following reasons.
1. Rate of Interest
2. Rate of Inflation
3. Exchange rates are susceptible to political instability and anticipations about the new
government.
4. Domestic Financial Market
5. Strong Domestic Economy
6. Economic Data like GDP & CPI
7. Stock Market also have correlation with Exchange Rate.
8. Balance of Trade
9. Government Budget Deficit and Surpluses
10. Any rumor in the markets also leads to fluctuation in the Exchange Rate.
If we consider the volatility of the Exchange Rate has increased due to the above mentioned
reasons to be 10%, still the new standard deviation is more than 27.9410+ 10% i.e..about
30.7351
Thus is quite obvious that the volatility of the Exchange Rate has increased since the
inception of FII investment
Therefore the hypothesis we constructed that the Net investment by FII has increased the
volatility of the Exchange Rate holds true, hence proved.
We can calculate the difference of the volatility of the Exchange rate (when FII investment
was not done and when FII investment are made), through t-Test by applying suitable
formula with the help of the two samples, their mean values and the standard deviations.
Chapter No.10
CONCLUSION
CONCLUSION
The study of FII net inflow has shown the positive correlation with the exchange rate. That
means when the FII net inflow done then appreciates the Rupee Value and the exchange rate
increase and vice versa.
The Net FII Inflow/Outflow has increases the volatility of exchange rate. It proves that
Standard deviation of exchange rate before and after FII Inflow/Outflow. In this Analysis
standard deviation more after the FII investment started in India.
Volatility of the exchange rate denotes to the ups & down in the exchange rate due to
fluctuation of the FIIs.
Chapter No.11
LIMITATION
LIMITATIONS
1. The result obtained through the regression equation has not accurate. There is probability
of occurrence of error. The error is known as the Standard Error denoted by the S.E. The
standard error value is 2.62 in case of the regression equation of Net FII investment on
Exchange Rate, Y=0.576x-18992,which indicates that the estimated FII investment for an
expected Exchange Rate can be either more or loss by Rs.2.650 crore.
2. The relationship of FII investment and Exchange Rate denoted by the Coefficient of
Correlation has a probable error with it. The value of Coefficient of Correlation is 0.063 and
the probable error is 0.672 it can be increase or decrease an exchange rate by Rs. 0.672.
3. The calculated values are taken up to 3 decimal places only. Actual value can be changed
if complete values are taken into account.
Chapter No.12
BIBLIOGRAPHY
BIBLIOGRAPHY
Book References:-
 Statistical Methods – Berry
 Research Methodology - C.R.Kothari.
 Foreign Exchange Management-D.Shivanandan
OfficialWebsites:-
 National Stock Exchange (www.nseindia.com)
 Reserve Bank of India (www.rbi.org.in)
 Security and Exchange Board of India (www.sebi.gov.in)
 Ministry of Finance (www.financeministry.gov.in)
 www.google.com
 www.wikipedia.com

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A

“ANALYTICAL STUDY OF IMPACT OF FOREIGN INSTITUTIONAL

Submitted To Rashtrasant Tukadoji Maharaj Nagpur University, Nagpur

MASTER OF BUSINESS ADMINISTRATION

Mr. JAYANTKUMAR C. KUMBHARE

“Backward Class Youth Relief Committee”

Mr. Jayantkumar C. Kumbhare

and is submitted to Rashtrasant Tukadoji Maharaj NagpurUniversity, Nagpur in

Dr.A. A. Paturkar, Prof.Amit Bankar, [Project Guide],

I am also thankful to all faculty of M.B.A. Department of U.C.O.E., Umrer who

I also express gratitude towards Prof. Amit Bankar, Co-ordinator,Dept.of

Mr. Jayantkumar C. Kumbhare

Chapter No. Particulars Page No.

2.3. What is Indian National Rupee [INR]?

2.4. Introduction of Exchange market of

4 Scope & Need of Study

5.1. Problem Definition

The project topic is on “Analytical Study of Impact of Foreign Institutional

2.2:FII (Foreign Institutional Investors)

Foreign institutional investor means an entity established or incorporated outside

Foreign Institutional Investors (FIIs) are entities established or incorporated

By incorporating a company under the Companies Act,1956 through

• Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the

2. Important terms to know about FIIs:

Sub-account includes those foreign corporations, foreign individuals, and institutions,

Broad Based Fund:

As a foreign Company through

4. FOREIGN INSTITUTIONAL INVESTORS REGISTRATION

• Insurance or reinsurance companies

• Charitable Trusts or Charitable Societies

• Asset Management Companies

• Institutional Portfolio Managers

• Power of Attorney Holders.

Parameters on which SEBI decides FII applicants’ eligibility

As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are

• Applicant should have track record, professional competence, financial

• The applicant should be regulated by an appropriate foreign regulatory authority

• Applicant must be legally permitted to invest in securities outside the country or

• The applicant must be a "fit and proper" person.

• Payment of registration fee of US $ 5,000.00

• Application in Form A duly signed by the authorized signatory of the applicant.

• A declaration by the applicant with registration number and other particulars in

• A signed declaration statement that appears at the end of the Form.

• Declaration regarding fit & proper entity.

Securities and Exchange Board of India

Division of FII & Custodian

Mittal Court "B" Wing, First Floor

224, Nariman Point

Mumbai 400 021

 Institution or funds or portfolios established outside India, whether incorporated

 Proprietary fund of FII.

Scope of Investments under the Portfolio Investment Scheme.

Trend of FIIs with the help of economic figures:

• In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese

• Boosting agricultural growth through diversification and development of agro

• Developing world-class infrastructure for sustaining growth in all the sectors of

• Allowing foreign investment in more areas.

Investment Ceilings for FIIs and its Regulations:

Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and persons

The total purchase of all NRIs/PIOs both, on repatriation and non-repatriation

Monitoring Foreign Investments