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Impact of FII on the volatility of Indian Market

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FII

• An institution established or incorporated outside India which proposes to make investment in India in securities.

• One needs to register with the Securities & Exchange Board of India (SEBI) to participate in the market.

• FIIs registered with SEBI fall under the following categories:

a) Regular FIIs

b) 100 % debt-fund FIIs

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Evolution of FII in India

• India opened its stock market to FII in September 1992.

• Since 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equities.

• This has become one of the main channels of FII in India for foreigners.

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Average Shareholding Pattern of Sensex Companies

Banks,Fis,Insurance Co.s10%

FIIs22%

Private Corpo-rate Bodies

3%Indian Public

13%NRIs3%

Promoters37%

Mutual Fund andUTIs

5%

Others8%

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Why FII called good friend for good time – volatile in

nature• In the Indian stock markets movement of the stock depends on the limited no of stocks.

• As FIIs purchase and sell these stocks in high quantity there is a high degree of volatility in the stock market .

• If any set of development encourages outflow of capital that will increase the vulnerability of the situation in the stock market.

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Higher FII flows - Impact

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2005 2006 2007 2008 2009 2010#

sensex(Rs.) 9397 13786 20286 9647 17464 17527

FII(US $ mn) 9482 8988 19995 -9338 18507 6084

2500

7500

12500

17500

22500

27500

32500

37500

42500

# Data till june 2010

FII v/s Sensex

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Research Methodology

• Data Collection:

Secondary Data-Internet,other reports and projects.

• Correlation:

We have used the Correlation tool to determine whether two ranges of data move together

2005 2006 2007 2008 2009 201038.2 28.84 37.73 -99.43 90.72 10.94

9,397

13,786

20,286

9,647

17,464 17,527

Volatility of Return v/s Sensex

Volatility of return Sensex

2005 2006 2007 2008 2009 201038.82 28.84 37.73 -99.43 90.72 10.94

9,482 8,988

19,995

-9,338

18,507

6,084

Volatility of Return v/s FII

Volatility of return FII

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Result

INDICES CO-RELATION WITH FII

Sensex 0.92

Here the correlation 0.92 which shows that both have positive relation if FII increasethen Sensex will also increase.

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Conclusion

• FII did have significant impact on Sensex.

• One of the reasons for high degree of any linear relation can also be due to the sample data.

• FII is not the only factor affecting the stock indices.

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THANK YOU…….!!