Foreign Investments in the Indian Stock Market: An Empirical Analysis

Abstract

Foreign Direct Investments (FDI) and Foreign Institutional Investors (FII) provide capital for the growing Indian economy, to develop her infrastructure, such as sea ports, railways, roadways, airports, telecommunication, and other services. The present pace of industrialisation in India has also accelerated the need for foreign capital in the Indian context. The Indian stock market is continually responding to the changes in the foreign investment policies from time to time. This research analyses the impact of foreign capital investment inflow on the Indian stock market, with special reference to BSE Sensex and CNX Nifty. Statistical techniques such as correlation and multi-regression are used. The regression method used is Ordinary Least Squares (OLS) method or Auto-Regressive Distributed Lag (ARDL) Cointegration method, depending on whether the data is stationary, at level or not, with further analysis on long-run and short-run relationship among the variables studied. The research finds that there exists a weak negative correlation between FDI and Sensex, whereas a strong positive correlation exists between FDI and Nifty, as well as between FII and Sensex and FII and Nifty. Further, the variable FII shows a significant relationship with Sensex, whereas the relationship between FDI and Sensex is insignificant. FII also showed a significant positive relationship with Nifty, but the relationship between FDI and Nifty is insignificant. In summary, FII only showed a positive relation to stock movements, whereas with FDI, it was insignificant. Based on the empirical fi ndings, FDI shows only long-run relationship towards the Indian Stock markets. It is recommended that the government must attract more FDI for economic growth, through industrial growth, infrastructural developments, technological upgradations, competitive advantages, and more. On the other hand, FII are directly connected to the stock market movements and also help in the growth and development of the country, in short-run as well as the long-run. This indicates that the government must adopt appropriate measures to attract more foreign institutional investors, in order to strengthen the economic development. This research contributes to the decision-making by the government regarding the promotion of FII or FDI in short-run or long-run, for accelerating growth in the economy. This finding is highly relevant in the contemporary context, as this relationship is derived for India based on recent data.

Keywords: India, Time Series, FDI, FII, ARDL, OLS, CNX Nifty, BSE Sensex

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