Foreign institutional investments in India: an empirical analysis of determinants

Abstract

This paper tries to explore the important determinants of Foreign Institutional Investments (FIIs) in India as it has become extremely important to manage such large flows inward and outward for the existing policy makers in recent times. These flows can be trivial for the home country (the country from which they originate), but when changed into rupee their volume can impact the whole financial market. In this study the determinants are identified through Autoregressive Distributed Lag (ARDL) Bounds Testing Approach using monthly data for the period from January, 2000 to August, 2013. Both domestic and foreign factors turned out to be significant determinants of FIIs. Monthly return, market capitalization and price earnings ratio of domestic market and currency exchange rate are country specific or domestic macroeconomic variables which have significant impact on FIIs in India.Monthly returns on S and P 500 Index and Producer Price Index of US representing foreign (home) country inflation (PPI) have negative impact on FIIs.