Impact of Foreign Institutional Investments on Domestic Stock Market: An Evidence From Indian Stock Market

Abstract

It is evident from the number of studies that investments by Foreign Institutional Investments and the movements of Sensex are quite closely correlated in India and Foreign Institutional Investment (FIIs) wield significant influence on the movement of Sensex. In Indian stock market, FIIs have a disproportionately high level of influence on the market sentiments and price trends. Because of this local market participants perceive the decision taken by FIIs in their assessment of the market and tend of follow FIIs. With this context, the present study tries to examine: the association of the Bombay stock Exchange Sensitivity Index (Sensex) with the net FII flows by applying the coefficient through the historical volatility of the market Results of this study show that not only the FIIS are the major players in the domestic stock market in India, but their influence on the domestic markets is also growing. There is a partial correlation between the BSE Sensex and FIIs. Volatility is measured as the standard deviation of monthly closings of the Sensex. This remained almost stable for an eleven year period. Last quarterly results indicate a heavy investment by international funds. Heavy investments of funds amplify the results on high deviations which induce high fluctuations in the market.