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A study on impact of foreign institutional investors on Indian stock market By: Anantha B 10TUCMA002

Impact of Foreign Institutional Investments on Indian Stock Market

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Did this project in 4th sem of MBA as Dissertation Project.

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Page 1: Impact of Foreign Institutional Investments on Indian Stock Market

A study on impact of foreign institutional investors on

Indian stock market

By:Anantha B

10TUCMA002

Page 2: Impact of Foreign Institutional Investments on Indian Stock Market

Introduction:

Foreign Institutional Investors have gained a significant role in Indian stock markets. The dawn of 21st century has shown the real dynamism of stock market and the various benchmarking of sensitivity indices (BSE Senex and S&P CNX NIFTY) in terms of highest peaks and sudden falls. In this context present project examines the contribution of foreign institutional investment in Indian Stock Market. Also attempts to understand the behavioural pattern of FII during the period March-2007 to February 2012 and examine the volatility of both indices due to FII. The data for the information obtained from the secondary sources like website of BSE Sensex. We have attempted to explain the impact of foreign institutional investment on stock market and Indian economy. Also attempts present the correlation and regression between FII and both BSE Sensex and S&P CNX NIFTY.

Page 3: Impact of Foreign Institutional Investments on Indian Stock Market

MethodologyThe impact of FII inflows on Indian stock market is to be determined. For this purpose the secondary data is taken on monthly basis from the website. To know the impact of inflows the Karl Pearson’s Co-efficient of correlation and Regression analysis have been used. It would show whether the impact is positive or negative and how much the Indian stock market would vary with respect to FII. For the purpose of calculation SPSS and MS-Excel software have been utilised.

Objectives of the studyFollowing are the objectives of the study:• To study the scope and trading mechanism of Foreign Instititutional investors in India.• To find the impact of net investments made by foreign institutional investors on S&P CNX NIFTY. • To find the impact of net investments made by foreign institutional investors on BSE Sensex.• To find the trend of foreign institutional investment

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Limitations of the study1. The project has been prepared in two months, so due to time limitations depth analysis of such a wide concept may contain some lacuna. IN this report impact of FII on the stock market has been analyzed considering BSE Sensex ans S&P CNX NIFTY. But only these two may not depict exact picture of the entire stock market.2. The data for calculation is taken on monthly basis. The data on daily basis can give more positive results.3. The secondary data that I have used in this study may not give true picture of the concern.4. For calculation purpose I have used only Correlation and Regression methods. Only these two methods may not give accurate information about the impact of FII on stock market

Page 5: Impact of Foreign Institutional Investments on Indian Stock Market

1 FINDINGSAfter the analysis following are the findings of the study: 1. There is a positive correlation between FII inflows and Indian Stock Market.2. From the data interpretation and analysis we can come to the conclusion that the correlation between the net investment made by foreign institutional investors and the values of the BSE Sensex is 39% and hence the inflow made by FII affects the BSE Sensex. The data collected is from March 2007 to February 2012.3. From the data interpretation and analysis we can come to the conclusion that the correlation between the net investment made by foreign institutional investors and the values of the S&P CNX NIFTY is 39.6% and hence the inflow made by FII affects the S&P CNX NIFTY in a moderate way. The data collected is from March 2007 to February 2012.4. The R-square statistics shows that the value of BSE Sensex is dependent on FII to the extent of 15.2% and for the remaining 84.8% depends on other factors such as inflation, exchange rates, etc.5. The R-square statistics shows that the value of S&P CNX NIFTY is dependent on FII to the extent of 15.7% and for the remaining 84.3% depends on other factors.6. FIIs have less impact on Indian stock indices. Other unexplained variables are also influencing the Indices. There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. Thus there exists a significant relationship between the inflows of FII and the Indian Stock Market.  

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2 CONCLUSIONThe main objective of this study was to determine impact of Foreign Institutional Investments on Indian stock market. To test this we have employed methodology of Karl Pearson’s Co-efficient of Correlation and regression analysis. Correlation was used to know there was positive effect or negative effect. Regression was used to find the extent of impact of FII over the stock market.According to Data analysis and findings, it can be concluded that FII do have any significant impact on the Indian Stock Market but there are other factors like government policies, budgets, bullion market, inflation, economical and political condition, etc. do also have an impact on the Indian stock market. There is a positive correlation between stock indices and FIIs but FIIs didn’t have high significant impact on Indian Stock Market. The null hypothesis is rejected. BSE Sensex and S&P CNX NIFTY showed positive correlation with FII from 2007 and 2012. Also the coefficient of determination is less in all the case. It shows the absence of linear relation between FII and stock index. This does not mean that there is no relation between them. One of the reasons for absence of any linear relation can also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market. But Foreign Institutional Investment in developing countries like India would help in increasing the productivity of labor and to build up foreign exchange reserves to meet the current account deficit. Foreign Investment provides a channel through which country can have access to foreign capital.     

Page 7: Impact of Foreign Institutional Investments on Indian Stock Market

SUGGESTIONSAfter the analysis of the project study, following suggestions can be made: 1) Simplifying procedures and relaxing entry barriers for business activities and providing investor friendly laws and tax system for foreign investors.  2) Allowing foreign investment in more areas. In different industries indices the FIIs should be encouraged through different patterns like futures, options, etc. 3) Somewhere, a restriction related to the track record of Sub- Accounts is also to be made on the investors who withdraw money out of the Indian stock market who have invested with the help of participatory notes.  4) We have to modernize and also have to save our culture. Similarly the laws should be such that it would protect domestic investors and also promote trade in country through FIIs. 5) Encourage industries to grow to make FIIs an attractive junction to invest.