Effect of FIIS and Foreign Exchange on Indian Stock Market

Abstract

India attracts a large sum of FIIs (Foreign Institutional Investors) every year. These foreign investments have a remarkable impact on Indian economy. The relationship of foreign exchange and FIIs with stock market is important because international reserves accumulation has been the preferred policy recently adopted by developing economies to achieve financial stability. Indian Stock Market, which is one of the indicators of the economic status, is also being affected by the foreign investments made and which can be made effect with the exchange rate. Present study investigates the impact of Net FII flows and Foreign Exchange Rate on Indian Stock Price Movements (BSE Sensex and CNX Nifty) in India, using monthly data from January 2008 to September 2016. The result shows that there is positive correlation between all the variables under study. The unit root test was applied to determine stationarity of the time series data and then by applying the Granger Causality Test. The result represents that foreign exchange and FIIs of India has positive impact on BSE-Sensex and CNX-Nifty. There is bi-directional Granger Causality between BSE-Sensex, CNX-Nifty and US Dollar. There is no causal relationship between CNX-Nifty and Pound but uni-directional causality between BSE-Sensex and Pound. There is bi-directional Granger Causality between BSE-Sensex and FII flows but uni-directional causality between CNX-Nifty and FII flows.

Keywords: FIIs, foreign exchange, BSE-Sensex, CNX-Nifty

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