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 FII
“An institution that is a legal entity established or
incorporated outside India proposing to make investments
in India only in securities.”-SEBI

Types Of FII: -

Normal FII: Investment in equity & non equity instrument in the

ratio 70:30
100% Debt FII: Invest in Government Securities or
Debentures/Bonds issued by an Indian Company
Sensex V/S Rs-$ Exchange rate
 Higher Expected
Economy Growth

Higher FII flow

Higher investment
& consumption
Demand FII flows
Virtuous Cycle
Appreciating INR

Lower Interest
Rate
Higher Money
Supply
 FII & the financial system
Conversion of
USD  INR INR Appreciates
Higher FII Inflow By Bank

Creation Of Liquidity RBI Buys USD

Higher Stock
Market Price
Lower Interest Rate

Higher Credit Off take

Wealth Effect, Higher Trade
Higher Assets Price Deficit

Higher Consumption

Capital Account
Surplus
Rising Demand

Higher Economy Foreign Reserve Balance Of

Growth Accretion Payment Surplus
Benefits of FII flows

 Increased capital availability

 Increased liquidity in Stock market
 Supplements domestic savings and investments
 Increased forex reserves
FII in INDIA

 Foreign institutional investors (FIIs) have pumped

in Rs 20,117 crore (US$ 4.3 billion) into the
Indian equity markets in the month of May 2009
— the highest in 19 months.
 Significantly, at US$ 1.04 trillion, India's market
capitalization (m-cap) has emerged as the ninth
largest in the world

SOURCE:- IBEF
Growth Expected in India
To sustain the GDP growth of more than 8 percent, India requires an
investment of USD 1.5 trillion in the next five years
2006
2006
 GDP – USD 590 billion
 GDP growth rate – 9 %
 Services contribution – 54 %
 FDI limit not 100 percent in major
industry sectors such as Telecom,
Semiconductors, Automobiles, etc.
 Balance of Trade – USD (-)46.2
billion
 Investment goal – USD 250 billion
2008
2008
 GDP – USD 750 billion
 GDP growth rate – 9.5%
 Services contribution – 60 %
 FDI limit is expected to be close to
100 percent in major industry
sectors such as Telecom,
Semiconductors, Automobiles,
etc.
 Balance of Trade – Should
increase with surging exports as
compared with imports
 Investment goal – USD 305 billion
2010
2010
 GDP – USD 900 billion
 GDP growth rate – 9%
 Services contribution – 60-65 %
 FDI limit is expected to be 100
percent in major industry sectors
such as Telecom,
Semiconductors, Automobiles,
etc.
 Balance of Trade – Should be
positive with increased level of
exports as compared with imports
 Investment goal – USD 370 billion
Issues & Problems
 Problems of Inflation and Creation of Asset Bubbles,
 Impact on Small Investors
 Impact on Exports
 Promotes short term investment than long term
 Impact on Banking Institutions
 Impact on Stock Market
 Largest Credit –Consumption cycle in India funded by FII
flows
 Real economy Impact-Currency, Interest rates, Bad
Credit, Stock Markets-Negative Wealth effects
 Disorderly adjustments of imbalances-Financial
Instability
 What can be done ?
 Permit dollar settlements for FIIs
 mitigate risks of currency fluctuations
 improve the volume and liquidity of the derivatives market
 Increase cap on G-Sec Bond Markets
 Benefits of Global flows v/s the cost of instability.
 Lock in Period
 Revise Normal FII Investment ratio
 Participatory Notes- Actual Investor should come into picture
 Option of converting Equity into Debt
 Strong macro economic policy/reform framework
 Strong regulatory framework, Corporate Governance
 Strengthening the financial & banking system
 Developing & deepening the currency & money markets
 Allow INR to appreciate
Thank You