Project on

IMPACT OF FDI AND FII ON INDIAN STOCK MARKET

Submitted

In partial fulfillment
for
the award of the degree

Of

Master of Commerce
By

Sheetal Maurya
(M.com semester 2)
(Batch: 2014-2016)
Tutorial Group F

To

DEPARTMENT OF COMMERCE
DELHI SCHOOL OF ECONOMICS
University of Delhi

(April, 2015)

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IMPACT OF FDI AND FII ON INDIAN STOCK MARKET

I. OBJECTIVES OF THE STUDY

  To study the trends and patterns of foreign capital flow in to India in the form of FDI & FII 
  To study the impact of Foreign Direct Investment (FDI) on Indian stock market (Sensex and Nifty). 
 To study the impact of Foreign Institutional Investment (FII) on Indian stock market (Sensex and Nifty). 

II. SCOPE OF THE STUDY

The present study takes 14 years data (from 2000 to 2014) into consideration. To study the impact of FDI & FII on
Indian stock market, Sensex and Nifty was a natural choice to be considered in the study, as it is the most popular
stock market indices and widely used by market participants for benchmarking.

III. RESEARCH METHODOLOGY

A. Data Collection
This study is based on secondary data. The required data related to FDI and FII have been collected from various
sources i.e. Bulletins of Reserve Bank of India, publications from Ministry of Commerce, Govt. of India. The BSE
Sensex and CNX Nifty data is down loaded from the websites of bseindia and nseindia respectively. Daily closing
index value are taken and averaged to get the index value for each year, which is considered as more representative
figure of index for the entire year rather any one day‘s/month‘s closing figure of the index. The present study
considers 11 years data starting from 2001 to 2014.

B. Analytical Tools & Technique

In order to analyze the collected data the statistical tools such as correlation and Multi regression model is used.
Correlation coefficient is a statistical measure that determines the degree to which two variable's movements are
associated. Correlation coefficient value ranges from -1 to 1. Negative value of correlation indicates: if one variable
increases in its values, the other variable decreases in its value and positive value indicates: if one variable increases
in its values the other variable also increases in its value. In the current study to study the linear relationship between
variables such as FDI & FII and Sensex & Nifty correlation is applied. The multiple regression analysis is a
statistical technique used to evaluate the effects of two or more independent variables on a single dependent
variable. In the current paper attempt is made to study the impact of FDI & FII on Sensex and Nifty. So FDI & FII
are considered as the two independent variables the dependent variable for model 1 is Sensex and Nifty for model 2.

ANALYTICAL SOFTWARES: SPSS and EXCEL

ANALYTICAL TOOLS: Correlation, multiple regression, T-test.

C. Model Building:
Further, to study the impact of Foreign Direct Investment & Foreign Intuitional Investors on Indian stock market,
two models were framed and fitted.

Model 1 depicts Sensex as dependent variable; where as independent variables are FDI and FII. Model 2 depicts
Nifty as dependent variable; where as independent variables are FDI and FII.

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The two model equations are expressed below:
MODEL 1: BSE SENSEX = a + b1 (FDI) + b2 (FII)
MODEL 2: CNX NIFTY = a + b1 (FDI) + b2 (FII)

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 IV. DATA ANALYSIS AND INTERPRETATION

The following table 1 presents the amount of flow of FDI and FII in India in terms of US$ million. The flow of
FDIs has shown an increasing trend during the considered period except during the years i.e. 2001 to 2004 and the
year 2010-11. The flow of FII has shown a mixed trend, during the year 2008-09 there was a negative flow of FII.
When flow of FII and FDI are compared, the flow of FII is less than flow of FDI in to India except for three years
i.e. from 2003 to 2006

Table 1: Flow of FDI and FII

FDI change in FII change in BSE CNX

Year (US$
(US$ million) FDI million) FII Sensex Nifty
2000-01 4,029 1,847 4269.68 1334.76
2001-02 6,130 2101 1,505 -342 3331.94 1077.02
2002-03 5,035 -1095 377 -1128 3206.28 1037.22
2003-04 4,322 -713 10,918 10541 4493.53 1427.5
2004-05 6,051 1729 8,686 -2232 5740.98 1805.26
2005-06 8,961 2910 9,926 1240 8280.08 2513.44
2006-07 22,826 13865 3,225 -6701 12277.32 3572.44
2007-08 34,835 12009 20,328 17103 16568.88 4896.59
2008-09 41,874 7039 -15,017 -35345 12365.55 3731.02
2009-10 37,745 -4129 29,048 44065 15585.21 4657.76
2010-11 32,901 -4844 29,422 374 18605.17 5583.54
2011-12 46556 13655 16812 -12610 19426.71 7453.50
2012-13 34298 -12258 16812 10770 21170.68 5908.09
2013-14 36396 2098 5010 -22572 27499.42 5429.77
Source: FDI & FII from various reports of DIPP
BSE & NSE from bseindia and nseindia websites
Table 1: Flow of FDI and FII

Figure 1: FDI and FII movements

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Observations:

 The FII is more volatile than FDI.

 The FDI in India shows an increasing trend. The FDI in India increases tremendously during 2005-2007.
And during the same time FII also starts increasing.
 The FDI trend becomes quite volatile after 2008 crisis.
 No clear trend can be identified in case of FII of past one decade.

A. Correlation between FDI & FII and Sensex & Nifty:

Correlation is applied to study the statistical relationship of the variables FDI, FII, BSE Sensex and CNX Nifty.
The following table 2 presents the output, when correlation is run to the 14 years data considered.

Table 2: Correlation between FDI & FII and Sensex & Nifty

Correlations

FDI (USD million) FII (USD million) BSE Sensex CNX Nifty

FDI (USD million) Pearson Correlation 1 .329 .861** .923**

Sig. (2-tailed) .251 .000 .000

FII (USD million) Pearson Correlation 1 .457 .548*

Sig. (2-tailed) .101 .042

BSEsensex Pearson Correlation 1 .920**

Sig. (2-tailed) .000

CNXnifty Pearson Correlation 1

Sig. (2-tailed)

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

Observations:

Based on the results it can be concluded that there is a:

 Very strong positive correlation between FDI & Sensex and FDI & nifty, and the correlation is found to be
significant at 1 percent level of significance.
 When it comes to FII it was found that there is a moderate positive correlation between FII & Sensex and
FII & nifty but the correlation is not significant at 1percent level of significance.
 The positive correlation between the FDI\FII and Sensex\nifty reveals the fact that the foreign investments
have a positive impact on Indian capital market. But the extent of the enhancement in BSE Sensex by FII
flows can be examined by running the regression analysis.
 The correlation between FDI and FII is observed very low the reason might be different investment
objective that FII and FDI investors have. Which majorly is short run profit in case of FII investors and
long term profit in case of FDI investors.

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B. (MODEL 1) Impact of flow of FDIs and FIIs on BSE Sensex

Multi regression is used to analyze the data.

Independent Variable: FDI and FII

Dependent Variable: BSE Sensex

BSE SENSEX = a + b1 (FDI) + b2 (FII)

The table 3 is the model summary reports the strength of the relationship between the model and the dependent
variable.

Table 3: Model Summary (Model 1)

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
a
1 .880 .775 .734 3984.89457
a. Predictors: (Constant), FII (USD million), FDI (USD million)
b. Dependent variable: BSE sensex

Observations:

 R, the multiple correlation coefficients, is the linear correlation between the observed and model-predicted
values of the dependent variable. Its large value indicates a strong relationship.
 R Square, the coefficient of determination, is the squared value of the multiple correlation coefficients. The
value of R2 is 0.775; it shows that the model explains 77.5% of the variation in dependent variable is
explained by the independent variables. In other words the dependent variables FDI and FII are able to
explain around 77.5% the variation of the dependent variable (SENSEX). This means the rest of the
variation in dependent variable are explained by some other factors that are external to this model.

Table 4

a
ANOVA
Model Sum of Squares df Mean Square F Sig.
b
1 Regression 602305789.304 2 301152894.652 18.965 .000
Residual 174673232.217 11 15879384.747
Total 776979021.521 13
a. Dependent Variable: BSEsensex
b. Predictors: (Constant), FII (USD million), FDI (USD million)

Observations:

The ANOVA table 4, tests the acceptability of the model from a statistical perspective. The Regression row displays
information about the variation accounted for by the model. The Residual row displays information about the
variation that has not been accounted by the model. F statistic is found significant, since the p value (0.000) less
than 0.05.

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Table 5

a
Coefficients
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 2418.403 1934.536 1.250 .237
*
FDI (USD million) .377 .072 .797 5.266 .000
FII (USD million) .118 .092 .194 1.284 .225
a. Dependent Variable: BSE sensex
b. * significant at 5% confidence level.

Finally, T - test is important because it will explain whether the predictor is statistically significant.

Testing the hypothesis: (Table 5)

FDI:
The null hypothesis and alternative hypothesis with respect to BSE Sensex and FDI can be stated as follows:

H01: Flow of FDIs in to India and BSE Sensex trend are independent.
Ha1: Flow of FDIs in to India and BSE Sensex trend are dependent.

The p-value related to FDI shown in table 5, is .000 less than 0.05 (i.e. it falls in rejection area) so null hypothesis
H01 is not accepted. Hence it is concluded that Flow of FDIs in to India and BSE Sensex trend are dependent.

FII:
The null hypothesis and alternative hypothesis with respect to BSE Sensex and FII can be stated as follows:
H02: Flow of FIIs in to India and BSE Sensex trend are independent.
Ha2: Flow of FIIs in to India and BSE Sensex trend are dependent.
The p-value related to FII shown in table 5, is .225 greater than 0.05 so null hypothesis H01 is not rejected. Hence
it is concluded that Flow of FIIs in to India and BSE Sensex trend are independent.

Figure 2: FDI and Stock Market

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D. (MODEL 2) Impact of flow of FDIs and FIIs on CNX NIFTY
Multi regression is used to analyze the data.

Independent Variable: FDI and FII

Dependent Variable: CNX NIFTY.

CNX NIFTY = a + b1 (FDI) + b2 (FII)

The table 6 is the model summary reports the strength of the relationship between the model and the dependent
variable.
Table 6

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
a
1 .958 .919 .904 652.29995
a. Predictors: (Constant), FII (USD million), FDI (USD million)

Observations:

 R, the multiple correlation coefficients, is the linear correlation between the observed and model-predicted
values of the dependent variable. Its large value (i.e. 0.958) indicates a strong relationship.
 R Square, the coefficient of determination, is the squared value of the multiple correlation coefficients. The
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value of R is 0.919; it shows that the model explains 91.9% of the variation. In other words the dependent
variables FDI and FII are able to explain around 92% the variation of the dependent variable (NIFTY).

Table 7

a
ANOVA
Model Sum of Squares df Mean Square F Sig.
b
1 Regression 52782697.632 2 26391348.816 62.025 .000
Residual 4680447.467 11 425495.224
Total 57463145.099 13
a. Dependent Variable: CNX nifty
b. Predictors: (Constant), FII (USD million), FDI (USD million)

Observations:
The ANOVA table 7, tests the acceptability of the model from a statistical perspective. The Regression row displays
information about the variation accounted for by the model. The Residual row displays information about the
variation that has not been accounted by the model.
F statistic is found significant, since the p value (0.000) less than 0.05. So, the model is significant.

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Table 8

a
Coefficients
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 657.584 316.670 2.077 .062
FDI (USD million) .107 .012 .832 9.135 .000
FII (USD million) .045 .015 .275 3.014 .012
a. Dependent Variable: CNX Nifty

Testing the hypothesis (table 8)

FDI:
The null hypothesis and alternative hypothesis with respect to CNX NIFTY and FDI can be stated as follows:

H03: Flow of FDIs in to India and NIFTY trend are independent.

Ha3: Flow of FDIs in to India and NIFTY trend are dependent.

The p-value related to FDI shown in table 8, is .000 less than 0.05 so null hypotheses H03 is not accepted. Hence it
is concluded that Flow of FDIs in to India and CNX NIFTY trend are dependent.

FII:
The null hypothesis and alternative hypothesis with respect to CNX NIFTY and FII can be stated as follows:

H04: Flow of FIIs in to India and CNX NIFTY trend are independent.
Ha4: Flow of FIIs in to India and CNX NIFTY trend are dependent.
The p-value related to FDI shown in table 8, is .012 less than 0.05 so null hypotheses H04 is not accepted. Hence it
is concluded that Flow of FIIs in to India and CNX NIFTY trend are dependent.

Figure 3: FII and Stock market

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 V. FINDINGS OF THE STUDY

 The FDIs flow has shown increasing trend during the considered period of study except in the recent past
two years and during 2002 to 2004. 

 The flow of FIIs did not show one single trend during the considered period of study. 
 There is a strong positive correlation between FDI & Sensex and FDI & nifty, and the correlation is
significant at 1 percent level of significance. 
 There is a moderate positive correlation between FII & Sensex and FII & nifty but the correlation is not
significant at 1 percent level of significance.
 Flow of FDIs into India and BSE Sensex trend are dependent. 
 Flow of FIIs into India and BSE Sensex trend are independent. 
 Flow of FDIs into India and CNX Nifty trend are dependent. 
 Flow of FIIs into India and CNX Nifty trend are dependent but this dependence is not as strong as
between FDI and CNX Nifty. 
 Daily BSE Sensex and daily CNX Nifty has low to moderate degree of positive correlation with daily
FII‘s investment. This implies that there are many other macroeconomic factors have indirectly affected
the daily BSE Sensex and daily CNX Nifty but their influence on the stock prices cannot be completely
ignored. Hence both indices move in direction of FII‘s investment.
 Economic growth i.e. IIP and GDP, inflation and interest rate are the basic parameters used by FII‘s to
invest in any countries. FII‘s investments also guide to economic growth of country since they bring the
much needed capital.
 FII‘s helped in the improvement of market efficiency. Since investment of FII‘s increasing therefore
SEBI have toimprove market trading efficiency in order to sustain FII‘s investment.
 The correlation between FDI and FII is positive and which means if one increases the other will also
increase. This is because increase in FII has an implication that foreign investors‘ confidence in India is
increasing and this will attract more FDI also. However the correlation is not significant.


Table 9: Summary of two models developed

Independent R2 Dependent Beta p Correlation

Variable Variable
FDI .797 .000* .861
Sensex .775
FII .194 .225 .457
FDI .832 .000* .923
Nifty .919
FII .275 .012* .548
*Significant at 5 percent level of significance

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 VI. SUGGESTIONS
Portfolio capital flows are invariably short term and speculative and are often not related to economic fundamentals
but rather to whims and fads prevalent in international financial markets. There are following policy implications,
which emerge from this analysis.
India should focus on strengthening their banking system rather than promoting financial markets because FIIs are
fair weather friends. Banks can provide the surest vehicle for promoting long-term growth and industrialization.
Since financial markets in India have its vital importance, but government should try to shield the real economy
from FIIs vagaries.
Government should set a minimum limit as well as maximum limit, within which FII invest in India, in order to
avoid volatility in Indian stock market (BSE sensex & CNX Nifty).

Apart from the money that is brought in, FIIs investment is a testament of increasing global investor confidence in
a particular economy and capital market. For a country like India this money brought in by the FIIs adds to the
foreign reserves which can be used to import oil, machinery etc. With increased FII investment in a country and the
increased confidence about the economy, FDI (Foreign Direct Investors) follow suit.

The 'Make-in-India' campaign initiated by the government would play an instrumental role to address many of the
issues faced by the country today. Increased investment in manufacturing facilities would make India self-
sustaining, create employment, increase the disposable income in the hands of the people and trigger the investment
cycle. Success of the 'Make-in-India' initiative would depend on the ability to attract investments — both domestic
and foreign — into the sector. The government may also consider incentivizing innovation and R&D in
manufacturing considering its immense potential to increase competitiveness.

India needs more foreign direct investment (FDI) as it brings in more stability vis-a-vis the liquidity and euphoria
generated by the FII money in the stock market. Policy reforms on the FDI front would encourage the much-needed
foreign investments into the country. To begin with, steps need to be undertaken to

 Improve India's ranking in terms of ease of doing business. For example, a single-window clearance
mechanism should be implemented so as to reduce the multiple approvals which are generally sought at
the national and state levels.
 There is an urgent need for the development of highways, ports, railways and setting up of airports in
smaller cities.
 The government should provide for updating key policies by making laws that are liberal, giving tax and
non-tax incentives. Giving concessions such as lower minimum alternate tax (MAT), among others, would
provide extra push to these sectors

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 VII. SUMMARY & CONCLUSION
The flow of FDI & FII accelerated the Indian economy and also gave opportunities to Indian industry for
technological up-gradation, gaining access to global managerial skills and practices, optimizing utilization of human
and natural resources and global competitive advantage with greater efficiency. Most importantly FDI is central for
India‘s integration into global production chains which involves production by MNCs spread across locations all
over the world.

From the current study it is evident that there is a strong positive correlation between FDI & sensex and FDI & nifty
and moderate positive correlation between FII & sensex and FII. Table 9 presents the summary of the two models
developed. Using Multi regression two significant models emerged. In the first model Sensex as a dependent
variable, both FDI and FII were found to be significant predictor. Similar results were obtained for second model
Nifty as a dependent variable. Hence it can be concluded that the impact of flow of FDI on Indian stock market is
significant were impact of FII on indian stock market is not as significant as in case of FDI.

Entities covered by the term ‗FII‘ include ―Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager, university funds, endowments,

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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

Although the observation indicates that FII do not have much significant impact on stock market but still Foreign
portfolio inflows through FIIs, in India, are important from the policy perspective, especially when the country has
emerged as one of the most attractive investment destinations in Asia.

A general perception about the FIIs is that they are speculators and their investment is motivated by short- term
gains. The FIIs in pursuit of short- term gains adopt short- term trading strategies such as positive feedback trading
and herding (i.e. buy or sell stocks together as a group). Such behavioral biases of FIIs, it is believed, may lead to
price overreaction and contribute to the creation or exacerbation of a financial crisis.

Advantages of FDI:
 Increase economic growth due to different international products
 Employment will increase
 Billion dollars will be invested in Indian market
 Spread of import and export business in different countries
 Agriculture related people will get good price of their goods
 Up gradation of technology.
 Improvement in export competitiveness.
 Improvement in BOP.
 Revenue to government in form of corporate taxes.

Disadvantages of FDI:
 Adverse effect on competition( e.g. predatory prices)
 Adverse effect on BOP (through repatriation of profit).
 National sovereignty and autonomy is affected by allowing FDI.
 An economically backward class person suffers from price raise
 Retailer faces loss in business
 Workers safety and policies are not mentioned clearly

Although the data and finding suggest that FDI in India has increased significantly over period of time also that is a
strong predictor of stock market movement; but according to latest report on world investment report by UNCTAD,
India is placed in fourth quartile in ―FDI contribution index‖ which ranks economies on the basis of the significance
of FDI and foreign affiliates for their economies.

WORLD INVESTMENT REPORT 2012 BY UNCTAD

The UNCTAD FDI contribution index – introduced for the first time in the World Investment Report 2012 – ranks
economies on the basis of the significance of FDI and foreign affiliates for their economies in terms of value added,
employment, wages, tax receipts, exports, research and development expenditures and capital formation. According
to this year‘s index, the host economy with the largest contribution by FDI is Hungary, followed by Belgium and the
Czech Republic.

The UNCTAD FDI attraction index, which measures the success of economies in attracting FDI (in total and in
relation to their size), features eight developing and transition economies in the top 10, compared with only four a
decade ago. Newcomers in 2011 to the top ranks include Ireland and Mongolia. Just outside the top 10, a number of
countries saw sustained improvements in their rankings, including Peru and Ghana, both of which have improved
their rankings in each of the last six years.

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14
 BUDGET 2015: PRESENT GOVERNMENT’S POLICY TO ATTRACT FOREIGN
INVESTMENT.
1. Seeking to the simplify the FDI regime, the government
proposed to do away with the distinction between different types
of foreign investments.Henceforth, portfolio and foreign direct
investments will be treated as one category and will have to
comply with FDI norms. Earlier, there were confusions over the
matter. The move seeks to do away with the different kinds of
overseas investment and bring about clarity in the norms.

2. It would also help in removing ambiguity on application of

sectoral caps, conditionalities and approval requirements in
different sectors.
3. Sectors which are already on a 100 per cent automatic route would not be affected. The move would help in
attracting foreign investments into the country. During April-January period of the fiscal, FDI grew by 27
per cent to $21.04 billion.
4. Norms related to minimum land area, capitalization and repatriation of funds for FDI in construction
development projects have also been further liberalized.

5. Besides giving greater flexibility to Indian companies to seek foreign investments, the new composite
foreign investment cap policy move is also aimed at attracting larger foreign investments as they eliminate
ambiguity on application of sectoral foreign investment caps, though in some cases this will result in FIIs
getting greater play immediately.

6. However, a government approval would be required if there is a transfer of ownership or control of Indian
companies from resident Indian citizens to non-resident entities.

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 7. The Budget proposal says the sectors which are on a 100% automatic route will not be affected by the new
norm. However, in sectors where 100% FDI is permitted, the FII/FPI limit can also touch 100% due to the
policy change.
8. In the case of private banks, within the prescribed aggregate foreign investment limit of 74%, the
FII/FPI/QFI investment is limited to a maximum of 49% of the total paid-up capital.
9. Also, in power and commodity exchanges as well as infrastructure companies in security market, within the
overall 49% foreign investment ceiling, there is a sub-ceiling of 26% for FDI and 23% for FII/FPI. In case
of CICs, though there is a composite cap of 74%, the FII/FPI investment is capped at 24%.
10. In his July 2014 Budget speech, finance minister Arun Jaitley had made the first step towards a composite
foreign investment cap policy when he proposed to hike foreign investment in defence and insurance from
26% to 49% with such a composite ceiling.
11. The UPA regime had also tried to remove the ambiguity on what is FDI and FII. In the FY14 Budget, it
was proposed that in order to follow the international practice, a broad principle was being brought out
where an investor having a stake of 10% or less in a company will be treated as FII and an investor having
an over 10% stake will be treated as FDI. A panel was then set up to examine the application of this
principle.
12. The new policy in the FY16 Budget move is also aimed at projecting to the world that India is attracting
larger foreign investments because from now on the official foreign investment data will include both FDI
and FII/FPI, official sources said.

VIII. LIMITATION OF THE STUDY

As the time available is limited and the subject is very vast the study is mainly focused on identifying whether there
does exist a relationship between FIIs and FDI and Indian Equity Stock Market. It is mainly based on the data
available in various websites. The inferences made are purely from the past year‘s performance.

BIBLIOGRAPHY
1. Krishna Reddy Chittedi (2009).‖ Volatility of Indian Stock Market and FIIs”,Journal: European Business Review.
Vol 15, pages 22-34ForeignInstitutionalInvestors.‖2004, http://www.icrier.org/pdf/wp124.pdf

2. Anubha Shrivastav(2013), “A Study of Influence of FII Flows on Indian Stock Market” ACCMAN Journal of
Management, Volume 5 Issue 1

3. Dhwani Mehta (2009),‖ A Study: FII Flows in India”, Research on Indian Stock Volatility. Vol 14. Publisher:
Emerald Group Publishing Limited.

Websites -
 http://www.sebi.gov.in/
 http://www.rbi.org.in/
 http://papers.ssrn.com/
 http://www.nseindia.com/
 http://www.bseindia.com/
 http://articles.economictimes.indiatimes.com

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