ABSTRACT

The liberalization process was initiated in India in the early 1990s brought radical changes in
the functioning of Indian stock market. Rising globalization, deregulation, and foreign
portfolio investments made the Indian stock exchanges competitive and efficient in their
functioning. The role of investors is the key to success of market guided economic system
and since it is FIIs who pump their savings into the markets, their investments need to be
channelized to the most rewarding sectors of the economy. One of the most dominant
investors groups that have emerged to play a critical role in the overall performance of the
stock market are Foreign Institutional Investors (FIIs).

Being a developing country, India attracts a large sum of FOO every year. These foreign
investments have a great impact on the economy of India. Indian stock market, which is one
of the indicators of the economic status, is also being affected by the foreign investments
made.

This portfolio flows by FIIs bring with them great advantage as they are engines of growth
while lowering the cost of capital in the emerging market. This paper indicates whether
Foreign Institutional investors really have an impact on the stock market of India. This study
has collected the yearly closing index of NSE & BSE and FII values from (1996 -2018). It
has also used correlation to find the extent of association between these two variables. The
inclusion criteria used for this study are that only NSE and BSE stock market values and FII
values.
 CHAPTER I

INTRODUCTION

Capital is considered to be the back bone of any economy. Developing countries like India,
domestic capital is not sufficient to fulfil the requirement of economy. Foreign capital plays a
very important role. Foreign Capital flow in India through two channels. They are Foreign
Direct Investment and Foreign Institutional Investment. FDI is considered as a more stable
form of foreign capital as compared to FII. But, FIIs inflows and outflows have a direct
impact on the stock market. The Foreign Institutional Investors (FIIs) contributions have
brought tremendous changes in the development of stock markets in India. Until the 1980s
debts and other development funds were used to settle the financial deficit. Foreign
investment and private commercial inflows were not much encouraged. From the beginning
of the reform process in the early 1990s, India's policy has changed substantially, aiming the
growing global foreign direct investment (FDI) and portfolio flows. Since 1992-93, when
FIIs were allowed to invest in Indian financial markets, foreign institutional investment has
increased over the years except in 2008-09. Investments by FIIs into India depends on market
performance and it was quite high quite high in last few years, particularly since 2003-04.
FIIs made a record investment in the Indian equity market in 2009, surpassing the 2007
inflows. In India, FIIs have a positive impact on the stock market, business transparency and
governance norms. Developing countries have strengthened their stock market to attract
foreign capital flows. FII is a short term investment by foreign institutions, in the financial
markets of other countries. These institutions are generally mutual funds, investment
companies, pension funds and insurance houses. FIIs strengthen and sustain the stock
exchanges and provide a better price for the scripts but at the same time, heavy withdrawal of
FIIs will create an adverse effect in the share price and in the Indian rupee.

CONCEPTS INCLINED WITH STUDY:

STOCK EXCHANGE

A STOCK EXCHANGE is a platform where buyers and sellers of securities issued by

governments, finance institutions, corporate houses etc., meet and where trading of these
securities takes place. This is a market of speculation. Stock exchanges may also provide
facilities for issue and redemption of securities and other financial instruments, and capital
events including the payment of income and dividends. Securities traded on a stock exchange
include stock issued by listed companies, unit trusts, derivatives, pooled investment products
and bonds. Stock exchanges often function as "continuous auction" markets, with buyers and
sellers consummating transactions at a central location. It provides necessary mobility to
capital and direct flow of the capital into possible and successful enterprise. The prices of
particular securities reflect the demand and supply. In fact, stock exchange is said to be a
barometer of economy of economy and financial health.

RISK AND RETURN

In investment, risk and return are highly correlated. Increased potential returns on
investment are directly proportional to increased risk. Different types of risks include project-
specific risk, industry-specific risk, competitive risk and market risk. Return refers to either
gains or losses made from trading a security.
VOLATILITY:

Volatility refers to the amount of uncertainty or risk related to the size of changes in a
security's value. A higher volatility means that a security's value can potentially be spread out
over a larger range of values. This means that the price of the security can change
dramatically over a short time period in either direction. A lower volatility means that a
security's value does not fluctuate dramatically, and tends to be steady.

BOMBAY STOCK EXCHANGE

The BOMBAY STOCK EXCHANGE (BSE) is Asia's oldest stock exchange. Based in
Mumbai, India, BSE was established in 1875.The BSE is the world's 11th largest stock
exchange with an overall market capitalization of $1.7 trillion. More than 5500 companies
are listed on BSE making it world's No. 1 exchange in terms of listed members and also the
fastest & the Fastest Stock Exchange in world with a median trade speed of 6 micro seconds.

NATIONAL STOCK EXCHANGE

The NATIONAL STOCK EXCHANGE (NSE) is a stock exchange in India. Set up in

November 1992, NSE is India's first fully automated electronic exchange with a nationwide
presence. The exchange is the result of the recommendations of a high-powered group set up
to study the establishment of new stock exchanges, which would operate on a pan-India basis.
Its shareholders consist of 20 financial institutions including stateowned banks and insurance
companies. NSE has a market capitalization of more than US$1.65 trillion, making it the
world’s 12th-largest stock exchange.

CNX NIFTY

The NIFTY 50 index is National Stock Exchange of India's benchmark stock market index
for Indian equity market. It covers 22 sectors of the Indian economy and offers investment
managers exposure to the Indian market in one portfolio. NIFTY 50 Index has shaped up as a
largest single financial product in India.

CONCEPTS APPLIED IN STUDY

BSE SENSEX

The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), alsocalled the BSE
30 or simply the SENSEX, is a free-float marketweighted stock market index of 30 well-
established and financially sound companies listed on Bombay Stock Exchange. The 30
component companies which are some of the largest and most actively traded stocks are
representative of various industrial sectors of the Indian economy. It is traded internationally
on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and
South Africa).

NIFTY 50

The NIFTY 50 is the flagship index on the National Stock Exchange of India Ltd. (NSE). The
Index tracks the behaviour of a portfolio of blue chip companies, the largest and most liquid
Indian securities. It includes 50 of the approximately 1600 companies listed on the NSE,
captures approximately 65% of its float-adjusted market capitalization and is a true reflection
of the Indian stock market.
The NIFTY 50 covers major sectors of the Indian economy and offers investment managers
exposure to the Indian market in one efficient portfolio. The Index has been trading since
April 1996 and is well suited for benchmarking, index funds and index-based derivatives.

FOREIGN PORTFOLIO INVESTMENT IN INDIA

Since 1990-91, the Government of India embarked on liberalisation and economic reforms
with a view to bring about rapid and substantial economic growth and move towards
globalization of the economy. As a part of the reforms process, the government under its New
Industrial Policy revamped its foreign investment policy, recognising the growing importance
of foreign investment as an instrument of technology transfer, augmentation of foreign
exchange reserves and globalisation of the Indian economy. Simultaneously, the
Government, for the first time, permitted portfolio investments from abroad by foreign
portfolio investors in the Indian capital market. The entry of FIIs seems to be a follow up of
the recommendation of the Narsimhan Committee Report on Financial System. The
committee only suggested that the capital market should be gradually opened up to foreign
portfolio investments.

From September 14, 1992 with suitable restrictions, Foreign portfolio Investors were
permitted to invest in all the securities traded on the primary and secondary markets,
including shares, debentures and warrants issued by companies which were listed or were to
be listed on the Stock Exchanges in India. While presenting the Budget for 1992-93, the then
Finance Minister Dr. Manmohan Singh had announced a proposal to allow reputed foreign
investors, such as Pension Funds etc., to invest in Indian capital market. After a notification
passed by SEBI January 2014, the Foreign Institutional investors were classified under FII.

FOREIGN INSTITUTIONAL INVESTMENT (FII)

FOREIGN INSTITUTIONAL INVESTMENT is the entry of funds into a country where

foreigners deposit money in a country's bank or make purchases in the country’s stock and
bond markets, sometimes for speculation. International portfolio flows refer to capital flows
made by individuals or investors seeking to create an internationally diversified portfolio
rather than to acquire management control over foreign companies. Diversifying portfolio
internationally has been known as a way to reduce the overall portfolio risk and earn even
higher returns. Investors in developed countries can strengthen their portfolio by buying
stocks in developing countries where stock markets have relatively low correlations with
those in developed countries.

The amount of FII is determined by the performance of the stocks of the countries where the
investors wants to invest his money relative to world markets. With the opening of stock
markets in various emerging economies to foreign investors, investors in industrial countries
have increasingly sought to realize the potential for portfolio diversification that these
markets represent.
IMPORTANCE AND SCOPE OF STUDY:
FII inflows and control have emerged as important policy issue in India. Among the Indian
policymakers, FIIs flows are believed to have a positive impact on the country‘s
development. FII flows supplement and augment domestic savings and domestic investment
without increasing the foreign debt of country. The foreign institutional investment inflows
have the potential of influencing the process of economic development of India through the
positive impacts on macro-economic fundamentals of the country. It has been perceived in
some quarters that FII flows are the major drivers of stock markets in India and hence a
sudden reversal of such flows may harm the stability of its markets.

Contrary to this belief, it is viewed by others that FII flows react to the existing crisis in the
stock market, possibly exacerbating it rather than causing it. An analysis of the direction of
causality to understand the possible devastating Impact of FII flows on the Indian economy is
important from the viewpoint of Indian policy makers especially when such flows have
recorded a sharp rise over the last decade. But, as very few studies have been done so far in
this regard, the present empirical study has been undertaken to throw some light on the cause
and effect relationship between FII flows and Indian stock market returns.

The paper is done to study the relation between the stock index movement of the Indian stock
market and the FII flow into Indian markets. The study takes 23 years into consideration from
1996-2018. The period has been selected so that the impact on Indian stock market can be
ascertained from the initial period FII investment was permitted in India. BSE SENSEX and
NIFTY 50, the two biggest indices, have been selected for the study.
LIMITATION OF STUDY
 Here we take just two indices in Indian stock market so we not take a whole Indian
market
 Here we apply regression and correlation not apply any other test so its limitation of
study.

PROFILE OF THE INDUSTRY:

Stock markets refer to a market place where in investor can buy and sell stocks. The price at
which each buying and selling happens determines the market behaviour .The individual
demand and supply for each stock determines the aggregate index of the stock exchange. A
stock exchange is an exchange where stockbrokers and traders can buy and sell capital
instruments. Capital instruments like shares, bonds, T-bills are commonly traded instruments.
Public companies have listed their stocks in the exchanges. Other stocks may be traded "over
the counter" (OTC), that is, through a dealer. Some large companies will have their stock
listed on more than one exchange in different countries, so as to attract international
investors. Stock exchanges may also cover other types of securities, such as fixed interest
securities (bonds) or (less frequently) derivatives which are more likely to be traded
OTC.(Tiwari,2014)

NSE (NATIONAL STOCK EXCHANGE):

THE NATIONAL STOCK EXCHANGE (NSE) is the leading stock exchange in India and
the fourth largest in the world by equity trading volume in 2015, according to World
Federation of Exchanges (WFE).It began operations in 1994 and is ranked as the largest stock
exchange in India in terms of total and average daily turnover for equity shares every year
since 1995, based on annual reports of SEBI.
NSE launched electronic screen-based trading in 1994, derivatives trading (in the form of
index futures) and internet trading in 2000, which were each the first of its kind in India.
NSE has a fully-integrated business model comprising our exchange listings, trading services,
clearing and settlement services, indices, market data feeds, technology solutions and
financial education offerings. NSE also oversees compliance by trading and clearing
members and listed companies with the rules and regulations of the exchange.
NSE a pioneer in technology and ensures the reliability and performance of its systems
through a culture of innovation and investment in technology. NSE believes that the scale and
breadth of its products and services, sustained leadership positions across multiple asset
classes in India and globally enable it to be highly reactive to market demands and changes
and deliver innovation in both trading and non-trading businesses to provide high-quality data
and services to market participants.

BSE (BOMBAY STOCK EXCHANGE):

The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The
Native Share and Stock Brokers Association". It is the oldest one in Asia, even older than the
Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making
Association of Persons (AOP) and is currently engaged in the process of converting itself into
demutualised and corporate entity. It has evolved over the years into its present status as the
premier Stock Exchange in the country. It is the first Stock Exchange in the Country to have
obtained permanent recognition in 1956 from the Govt. of India under the Securities
Contracts (Regulation) Act 1956.The Exchange, while providing an efficient and transparent
market for trading in securities, debt and derivatives upholds the interest of the investors and
ensures redresses of their grievances whether against the companies or its own member -
brokers. It also strives to educate and enlighten the investors by conducting investor
education programmers and making available to them necessary informative inputs.

REGULATORY FRAME WORK OF STOCK EXCHANGE:

A comprehensive legal framework was provided by the “Securities Contract Regulation Act,
1956” and “Securities Exchange Board of India 1952”. Three tier regulatory structure
comprising.
 Ministry of finance
 The Securities and Exchange Board of India
 Governing body

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

THE SECURITIES AND EXCHANGE BOARD OF INDIA was constituted in 1988 under a
resolution of government of India. It was later made statutory body by the SEBI act 1992.
According to this act, the SEBI shall constitute of a chairman and four other members
appointed by the central government.
With the coming into effect of the securities and exchange board of India act, 1992 some of
the powers and functions exercised by the central government, in respect of the regulation of
stock exchange were transferred to the SEBI.

FOREIGN INSTITUTIONAL INVESTOR:

The term Foreign Institutional Investor is defined by SEBI as under: "Means an institution
established or incorporated outside India which proposes to make investment in Indian
securities. Provided that a domestic asset management company or domestic portfolio
manager who manages funds raised or collected or brought from outside India for investment
in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor."
Foreign Investment refers to investments made by residents of a country in financial assets
and production process of another country. 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’. The term is used most commonly in India to refer
to outside companies investing in the financial markets of India. International institutional
investors must register with Securities & Exchange Board of India to participate in the
market. One of the major market regulations pertaining to FII involves placing limits on FII
ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio.
The following entities are eligible to invest under:

FII Route: As FIIs Overseas pension funds, mutual funds, investment trusts, asset
management companies, nominee companies, banks, institutional portfolio managers,
university funds, endowments foundations, charitable trusts, charitable societies, a trustee or
power of attorney holders incorporated or established outside India proposing to make
proprietary investment or investment on behalf of a broad- based funds (i.e. fund having more
than 20 investors with no single investors holding more than 10 percent of the shares or units
of the fund).

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.

WHY FIIS REQUIRED?

FIIs contribute to the foreign exchange inflow as the funds from multilateral finance
institutions and FDI (Foreign direct investment) are insufficient. Following are the some
advantage of FIIs.
It lowers cost of capital, access to cheap global credit.

It supplements domestic savings and investments.

It leads to higher asset prices in the Indian market and has also led to considerable amount of
reforms in capital market and financial sector.

ENTRY OPTIONS FOR FIIs:

A foreign company planning to set up business operations in India has the following options:
Incorporated Entity By incorporating a company under the Companies Act,1956 through
Joint Ventures; or Wholly Owned Subsidiaries

REGULATIONS:

FII registration and investment are mainly governed by SEBI (FII) regulations, 1995.
Following entities / funds are eligible to get registered as FII:

1. Pension Funds

2. Mutual Funds

3. Insurance Companies

4. Investment Trusts

5. Banks

6. University Funds

7. Endowments

8. Foundations

9. Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also
eligible to be registered as FIIs:

1. Asset Management Companies

2. Institutional Portfolio Managers

3. Trustees

4. Power of Attorney Holders

FIIs registered with SEBI fall under the following categories:

1. Regular FIIs-those who are required to invest not less than 70% of their investment in
equity-related instruments and 30% in non-equity investments.

2. 100% debt fund FIIs-those who are permitted to invest only in debt instruments.

PROFILE OF THE COMPANY:

COMPANY PROFILE:
Angel is a one of the leading stock broking and wealth management firm, we are
revolutionizing the face of retail investing in India with a tech-edge. A 30 year young
company, we serve our clients pan India with the agility of a start-up; offering an extensive
range of financial solutions, aided by hi-tech digital technology and ably complemented by a
colossal presence of 16,308 trading terminals and a mammoth network of sub-brokers. The
Angel Group is a member of the Bombay Stock Exchange (BSE), National Stock Exchange
(NSE) and the two leading Commodity Exchanges in the country: NCDEX & MCX. We are
also registered as a Depository Participant with CDSL.

COMPANY HISTORY:
Angel began journey in 1987, with the objective to serve the highly neglected sector of retail
investors. Committed to provide ‘Real Value for Money’ to all our clients, we kept
reinventing ourselves, leveraging the best technology of every era.
Today we have emerged as a game-changer for the retail investing segment by offering
innovative financial solutions which was earlier limited only to the HNI segment. ARQ -our
hyper intelligent investment engine has bridged the gap between new and seasoned investors
by offering personalized investment advice and an array of other advantages.
With many industry first, like DKYC, Trade in 1 hour, Customer service on Twitter and
Facebook and Worry-free investing, we are helping the investors of digital India to make
informed and fruitful investment decision with unprecedented convenience.

PRODUCTS & SERVICES OF ANGEL BROKING LIMITED:

1. Equity Trading
 2. Currency Trading
3. Commodities Trading
4. F&O Trading
5. Demat Account
6. Stock Advisory
7. Trading Account
8. Portfolio Management Service

SWOT ANALYSIS:

STRENGTHS:

 Wide coverage over the country

 One stop shop for all financial solutions.
 Multiple products and services.
 It is the member of both NSDL and CDSL.

WEAKNESS:

 The services from employees to sub brokers is lagging, they are very slow in solving
sub brokers issues.
 Less penetration in rural areas

OPPORTUNITY:

 High purchasing power and people looking to more investment opportunities.

 Emerging new technology.

THREATS:

 Entry of foreign finance firms in Indian Market.

 Fluctuating market conditions affect the business.

This chapter gives an overall background in which the study is conducted. The concepts are
applied to perform the study has been discussed. The overview of the industry for this study
has been briefly discussed. It also gives a deep and wide outlay about the industry and its
connection with the research. The Review of Literature related to the study topic will be
continued in Chapter II.
 CHAPTER II

REVIEW OF LITERATURE

The objective of this chapter is to understand more about the research study by reviewing the
previous article. These empirical studies are reviewed for the purpose of gaining insights of
the problem. This review is also done to understand about the background, in which the study
is set. Review of literature provides the tools to analyse as well as their finding, which is
served as a base of this study. These empirical studies help to identify the appropriate
statistical tool that can be employed. It provides information regarding the method with
which the data can be classified.

While looking at literatures available it was found that most of the developing counties
opened up their economies by dismantling capital controls with a view to attracting foreign
capital, supplementing it with domestic capital in the early 1990's.

Choe et. al., (1998) This paper is a piece of a bigger research program relating to the job of
subordinates amid monetary emergency and furthermore part of the exploration relating to
the reasons for the Asian money related emergency. The Korean market is considered as a
result of two reasons: (1) it is an agent case of the Asian monetary emergency and (2) there is
a definite informational collection accessible of all exchanges by various sorts of heroes,
including remote speculators.

The paper begins with establishing first the role of derivative securities during the crisis. The
paper focuses on this largely overlooked and important feature of the crisis. Once the role of
futures contracts is understood, the paper complements Choe et al.'s analysis by examining
whether derivatives trading by either domestic or non-resident investors, or both together,
exerted a de-stabilizing influence during the crash. The results in this paper indicate that
futures market played a key role during the Korean stock market turbulence in 1997. The
fraction of index futures volume started to rise dramatically in July 1997, three months ahead
of the crash, and died out after the crash that selling pressures in the futures market during
the crisis were transmitted to the cash market causing a decline in cash prices, a pattern which
was not observed prior to the crisis. Given the significance of futures trading, we examine
whether futures trading by either domestic or foreign investors, or both together, exerted a de-
stabilizing influence during the crisis. The foreign investors increased their presence in the
futures market and dramatically increase their herding of futures trading. Foreign traders also
become negative feedback traders of futures and the permanent impact of their futures
contracts sales increases substantially during the crisis.

Chakrabarti, (2001) This paper is about the regime shift in the determinants of FII following
the Asian financial crisis. He used the data of BSE for a period of 6 years from May 1993 to
Dec 1999 by applying the granger causality test on the data he found that in the pre – Asian
crisis period, any change in FII had appositive impact on equity returns, but it found a reverse
relationship in post Asian crisis period. The study points out that the change in FII is mainly
due to change in equity returns.

According to Mukherjee, (2002) the various probable determinants of FII are (1) Foreign
investment flows to the Indian markets tend to be caused by return in the domestic equity
market; (2) Indian equity market return has an impact on FII flows; (3) performance of the
Indian equity market are influenced by the FIIs sale and FIIs purchase, (4) FII investors do
not consider Indian equity market for the purpose of diversification of their investment; (5)
returns from the exchange rate variation and the fundamentals of the economy may have an
impact on FII decisions, but such influence do not prove to be strong enough.

Over the previous decade India has slowly developed as a significant goal of worldwide
speculators' interest in rising value markets. This paper has done a investigation on the
relationship of outside institutional speculation (FII) streams to the Indian value advertise
with its conceivable covariates dependent on a period arrangement of every day information
for the period January, 1999 to May, 2002 and to distinguish the pertinent covariates of FII
streams into and out of the Indian value market and furthermore to decide the idea of
causality between the significant factors. The arrangement of conceivable covariates
considered contains two sorts of factors. The main sort incorporates factors reflecting every
day showcase return and its instability in residential and global value markets, in view of the
BSE Sensex, S&P 500 and the MSCI WI, just as proportions of co-development of profits in
these business sectors. The second sort of factors, are basically macroeconomic ones like day
by day returns on the Rupee-Dollar conversion scale, short run loan cost and file of modern
creation; factors that are probably going to influence outside financial specialists assumption
regarding returns in the Indian value advertise.

Additionally, they relate day by day FII streams first to the factors referenced above
recognizing three sorts of streams, to be specific, FII streams into the nation or FII buys, FII
streams out of the nation or FII deals and the net FII inflows into the nation or FII net and
later change the model determination to incorporate a short previous history of the factors
over various time spans, similar to a week or fortnight. The results show that, though there is
a general perception that FII activities exert a strong demonstration effect and thus drive the
domestic stock market in India, evidence from causality tests suggests that FII flows to and
from the Indian market tend to be caused by return in the domestic equity market and not the
other way round. The regression analysis, in various stages, reveals that returns in the Indian
equity market is indeed an important factor that influences FII flows into the country. While,
the dependence of net FII flows on daily return in the domestic equity market is suggestive of
foreign investors' return-chasing behaviour, the recent history of market return and its
volatility in international and domestic stock markets have some significant effect as well. It
is also seen that return from exchange rate variation and fundamentals of the Indian economy
may have some influence on FII decisions, but such influence does not seem to be strong, and
finally, daily FII flows are highly auto correlated and this autocorrelation cannot be
accounted for by all or some of the covariates considered in our study.

The author Stanley Morgan (2002) has examined that FIIs have played a very important role
in building up India’s forex reserves, which have enabled a host of economic reforms.
Secondly, FIIs are now important investors in the country’s economic growth despite
sluggish domestic sentiment. The Morgan Stanley report notes that FII strongly influence
short-term market movements during bear markets. However, the correlation between returns
and flows reduces during bull markets as other market participants raise their involvement
reducing the influence of FIIs. Research by Morgan Stanley shows that the correlation
between foreign inflows and market returns is high during bear and weakens with
strengthening equity prices due to increased participation by other players.

Gordon and Gupta, (2003) The paper is about the causal effect from FII inflows to return in
BSE. They observed that FIIs act as market makers and book profits by investing when prices
are low and selling when they are high. Hence, there are contradictory findings by various
researchers regarding the causal relationship between FII net inflows and stock market
capitalization and returns of BSE/ NSE. Therefore, there is a need to investigate whether FIIs
are the cause or effect of stock market fluctuations in India.

Pal, P. (2004) This paper suggests that FIIs are the major players in the Indian stock market
and their impact on the domestic market is increasing. Trading activities of FIIs and the
domestic stock market turnover indicate that FII‟s are becoming more important at the
margin as an increasingly higher share of stock market turnover is accounted for by FII
trading in India.

The author Upadhyay (2006) has shown in her study that FIIs supplement and augment
domestic savings and domestic investment without increasing the foreign debt of our country.
Capital inflows in the equity market increase stock price, lower the cost of equity capital and
encourage investment by Indian firms. The high degree of volatility can be attributed to the
increase in investment by foreign institutional investors, which increase the stock prices.
Beside this, when any correction takes place and the stock price declines; there would be pull
out by these investors in a large number. According to the study, the reason for volatility is
that the foreign institutional investors manipulate the situation of boom in such a manner that
they wait till the index rises up to a certain height and exit at an appropriate time. This
tendency increases the volatility further.

Anand Bansal and J.S. Pasricha (2009) studied the impact of market opening to FIIs on
Indian stock market behaviour. They empirically analyze the change of market return and
volatility after the entry of FIIs to Indian capital market and found that while there is no
significant change in the Indian stock market average returns; volatility is significantly
reduced after India unlocked its stock market to foreign investors. In the next section we are
discussing the data sources and methodology of the study.

Studies also suggested that development of stock market in India has been the growing as
said by Saxena, Swami and Bhadauriya, Sonam, (2011) In the age of transnational
capitalism, significant amounts of capital are flowing from developed world to emerging
economies like India. The development of stock market in India has been the growing
participation of Foreign Institutional Investors in the last 15 years. In India, major portion of
FIIs has gone into equities since its inception in 1990's. Given the huge volume of these flows,
especially after 2003, its impact on domestic financial market is worthy of a rigorous
empirical analysis. The existing literature suggests that the short-term nature of FII has a
possibility of bidirectional causality running between it and stock returns. As the Indian equity
market is growing, the trend and future prospects in FIIs has become a topic of great concern.
The paper is intended at exploring the causal relationship between FIIs inflows and volatility
in indices of NSE by adopting Granger Causality test in a bi variate VAR framework. The
objective of the paper was to explore answer to the research question whether movements
in FIIs inflows have an effect on stock market returns or movements in stock market returns
have an effect on direction of FIIs inflows in India in particularly
at National Stock Exchange, one of the fastest emerging stock markets with high volatility.
The analysis covered daily data series on FIIs inflows and S&P CNX NIFTY for seven
financial years from April 2003 to March 2010. To investigate whether the data is stationary
or not, the researchers used Augmented Dickey Fuller test and Phillips Perron test.

The degrees of impact on daily foreign institutional investors Kumar, S.S.S., (2014) This
paper explains the impact of (FIIs) investments on the Indian market from January 2010
through January 2014. The motivation for the study is that the past studies on this topic are
based only on examining the relationship between FII investments in cash market and any
associated effects on stock market returns while ignoring the FII activity in equity derivative
markets. The impact of FIIs’ investments on Indian markets is re-examined in this paper by
considering FII activity in Nifty index trade on National Stock Exchange of India and
Singapore Exchange (SGX). The results show that Nifty index returns are statistically
influenced by FII investments in Nifty index futures. Further, Nifty index returns effect
the FIIs’ investments in Nifty index futures. Prima facie there is evidence of positive
feedback trading behaviour of FIIs. Hence, FIIs’ index futures activity could be used to
predict the Nifty returns. There is a contemporaneous relationship between FIIs investments
in cash and index futures market. SGX futures are not found to be influencing Nifty but Nifty
is a significant explanatory variable in SGX futures returns.

This chapter added more clarity to the topic. It also discusses briefly about the methodologies
adopted by previous empirical studies. This chapter provides useful insights about the
previous study’s objective. This chapter also talks about the findings of the previous studies,
which can be used as the base of this study. It also provided clarity regarding the tools and
data that can used in the research. The method in which the research is handled has been
discussed in the following chapter.
 CHAPTER III
RESEARCH METHODOLOGY
Research methodology is basically the science of how research is done scientifically. It is a
way to systematically and logically solve a problem, help us understand the process not
just the product of research, and analyzes methods in addition to the information obtained
by them. This chapter mainly consist of framework of overall study. It deals with the purpose
of the study and various methodologies employed in it. This chapter provide the systematic
insights about the study, This chapter deals with objectives of the study, the study design,
hypothesis involved and methods and tools of data collection and data analysis. This will act
as a roadmap to accomplish the objectives effectively and efficiently without deviating from
the original target. This will also provide brief explanation about the purpose of this research.

FORMULATION OF RESEARCH PROBLEM

The FII inflows have a greater impact than expected flows and further some researchers claim
that foreigners‘ do not destabilize the market. The foreign institutional investment inflows
have the potential of influencing the process of economic development of India through the
positive impacts on macro-economic fundamentals of the country. Thus, there are many
different opinions related to the impact of FII flows on Indian capital market and that is why
the research is been done.

The issue of whether FII flows affects stock market returns or the other way round is a matter
of some controversy. It has been perceived that FII flows are the major drivers of stock
markets in India and hence a sudden reversal of such flows may harm the stability of its
markets. It is viewed by others that FII flows react to the existing crisis in the stock market,
possibly exacerbating it rather than causing it.

An analysis of the direction of causality to understand the possible devastating Impact of FII
flows on the Indian economy is important from the viewpoint of Indian policy makers
especially when such flows have recorded a sharp rise over the last decade. This research
problem of the study is to identify the impact of FII in Indian stock market using various
statistical tools and also to provide insights cause and effect relationship between FII flows
stock index of Indian market.
OBJECTIVES:

 To study the growth trend of FIIs.

 To analyse the relation and impact of Foreign Institutional Investment (FII) on Indian
stock market
 To study the impact of crises on the market

VARIABLES CONSIDERED:

 Net purchases of FII

 BSE Sensex
 NIFTY 50

STUDY DESIGN:

The research design used to carry out this study is descriptive research design. Since the
research deals with statistical data and main aim to describe the factors affecting the problem
mentioned. The present study is analytical study. The secondary data is used for analysis and
to reach the objective of the study.

HYPOTHESIS:

Null Hypothesis

H01:- there is no significant impact of FII on NIFTY.

H02:- there is no significant impact of FII on BSE SENSEX.

SAMPLING DESIGN

The FII flows and SENSEX and NIFTY was collected for a time period from the year 2014 -
2018 has been collected from the SEBI website. The data collected for SENSEX and NIFTY
were monthly closing value and later it was converted into yearly average so that they
represent the real economic conditions of that period. Individual BSE SENSEX and NIFTY
data and FII investment act as sample elements.

SOURCES AND METHODS OF DATA COLLECTION:

The study is descriptive in nature and is based on secondary data. The data has been collected
from internet by exploring the secondary sources available on the websites. The data related
to FII flows has been collected from the SEBI website and for SENSEX and NIFTY the data
is been taken from the BSE and NSE website respectively.

METHODS AND TOOLS OF DATA ANALYSIS:

Data was analysed with both econometric and excel tools. Softwares like MS Excel were
employed to analyse the data. The analysis has been made by correlating the FII purchases
and the closing value of the indices for that particular year to identify whether a relationship
exists between them. Correlation has been used as data sets are real and it gives an accurate
statement of the strength of linear association between the two variables. The regression
analysis is used to evaluate the effects of independent variables on a single dependent
variable. In the current paper an effort has been made to study the impact of FII on Indian
stock exchange.

CORRELATION:

Correlation is a statistical tool that identifies the relationship between two variables. The
correlation(r) ranges from-1to1.Correlation may positive, negative, and no correlation.
Positive correlation means that as one data set increases, the other data set increases as well.
Negative correlation means that as one data set increases, the other decreases. No correlation
means that the two sets of data are not related at all.

REGRESSION:

COEFFICENT:

ANOVA

ANOVA is analysis of variance that can be employed through various tools. In this study
ANOVA has been employed through MS Excel. ANOVA compares the mean of different
groups and test the presence of any statistically significant difference that can be applied to
reject the null hypothesis.
This chapter gives an overall idea about the data used in the study. It also provides the
information regarding nature of data with respect to the time period. It also provides
extensive details about the statistical tools employed to obtain meaningful interpretation from
the data. This chapter is followed by the analysis of the obtained secondary, that was
collected from various sources for the purpose of interpreting results for the study.
 CHAPTER IV
DATA ANALYSIS AND INTERPRETATION
This chapter gives a brief explanation of the previous chapter. It widely employs the tools
that were discussed in Chapter III. Financial data like NIFTY and SENSEX were used to
understand the relationship between FII and Indian stock market. .

These data were secondary and were obtained from authenticated source. Data analysis plays
a vital role in any research study. The appropriate tools were used to understand the
relationship. It also provides descriptive details about the data followed by analysis. This
chapter also deals with the assumptions of the study, will help the researcher in the
proceeding with findings.

DATA ANALYSIS:

The following table gives the net purchases by FII in the Indian stock market from the year
2004-2018.

TABLE 1: Flow of FII

YEAR NET FII

2004 42,049.1
2005 41,663.50
2006 40,589.20
2007 80,914.80
2008 -41,215.50
2009 87,987.60
2010 1,79,674.6
2011 35,392.80
2012 1,63,350.1
2013 62,287.90
2014 2,56,211.85
2015 63,663
2016 -23,079
2017 2,00,048
 2018 -90,746

CHART 1: FOREIGN INVESTMENT FLOWS

From the above table and graph it can be concluded that Net flow of FII has considerably
increased from the year 2015 with certain declining values in the year 2008 on account of
sudden increases in sales which exceeded purchases. In year 2008 total FII flow slumped to
negative 41,215.5 due to the Housing market crash in 2008 in the USA. The two major global
events like the 2008 Global Financial Crisis and the 2011 Eurozone crisis which has forced
the world economy to rewrite the theories of finance about the impact of debt capital is the
vital aspect of analysis. Trading, clearing and settlement in equity shares were contracted to
T+3 which further contracted to T+2. In order to make the markets more efficient and
provide more opportunities to the investors, trading in government securities in stock
exchanges were permitted. Since then FII investment has continued to increase coupled with
macroeconomic conditions and one of the fastest growth rates amongst the developing
countries.

The following table gives average value of closing value of BSE SENSEX from 2004 to
2018.

TABLE 2: BSE SENSEX CLOSING VALUE

YEAR AVERAGE CLOSING VALUE

2004 5563.08

2005 7392.89

2006 11440.04

2007 15563.59

2008 14492.67

2009 13700.82

2010 18206.91

2011 17777.76

2012 17617.03

2013 19722.42

2014 24638.95

2015 27957.49

2016 25341.86
2017 29620.50

2018 32968.68
CHART 2: AVERAGE CLOSING VALUES OF BSE SENSEX

From the above table it can be ascertained that the value of BSE SENSEX has continued to
increase but within a certain period there was a sudden decline in the value which was
experienced by the country during this period. From this analysis the SENSEX came crashing
from 21,206 to 7697 shows their power and in 2011 during Eurozone crisis. After this crisis
in 2014 the SENSEX gained more outcomes within 2 months with the entry of Modi
Government. The intercept clearly shows that if the FII flows becomes zero the SENSEX
would come to 16000 levels from the present 27000 levels.

The following table gives the average closing value of NSE NIFTY from year 2004 to year
2018.

TABLE 3: NSE NIFTY CLOSING VALUES

YEAR AVERAGE CLOSINGVALUE

2004 1754.58
2005 2268.91
 2006 3357.09
2007 4571.29
2008 4344.74
2009 4113.96
2010 5461.12
2011 5335.91
2012 5341.52
2013 5915.90
2014 7360.30
2015 7946.35
2016 8561.30
2017 10530.70
2018 10862.55

CHART 3: AVERAGE CLOSING VALUE OF NSE NIFTY

From the above graph, it can be concluded that NSE NIFTY has shown similar trends which
were exhibited by BSE SENSEX as well. Also, in 2008 the graph shows a little slump which
can be attributed to the outflows by FII due to housing bubble crash in USA. Soon after,
crashing US markets forced our indices down. While the next few months saw the market
recover and rise sharply for a while and the Nifty was raised up to 7% in both 2010 and 2011
and considerably 9% in 2016 and also in the year 2017, Nifty rose by 11% and even rose by
3% in the following year 2018 in the beginning there was a small dip but gradually increased
after the unveiling of budget.

TABLE 4: FLOW OF FII AND AVERAGE CLOSING VALUES OF SENSEX AND

NIFTY

YEAR NET FII AVERAGE CLOSING AVERAGE CLOSING

VALUE (SENSEX) VALUE (NIFTY)
2004 42,049.1 5563.08 1754.58

2005 41,663.50 7392.89 2268.91

2006 40,589.20 11440.04 3357.09

2007 80,914.80 15563.59 4571.29

2008 -41,215.50 14492.67 4344.74

2009 87,987.60 13700.82 4113.96

2010 1,79,674.6 18206.91 5461.12

2011 35,392.80 17777.76 5335.91

2012 1,63,350.1 17617.03 5341.52

2013 62,287.90 19722.42 5915.90

2014 2,56,211.85 24638.95 7360.30

2015 63,663 27957.49 7946.35

2016 -23,079 25341.86 8561.30

2017 2,00,048 29620.50 10530.70

2018 -90,746 32968.68 10862.55

Correlation between FII and SENSEX

Correlation has been used to determine the statistical relationship between variables under
study FII and BSE SENSEX.