Foreign Institutional Investors and Stock Market Volatility: Evidence from India

Abstract

Foreign Institutional Investors (FIIs) has emerged as a mine of funds for Indian stock market. FIIs contribute to the development of Indian Stock Market but on the other hand FII unexpected inflows and outflows, sometimes leads to the precariousness in the market. The aim of this study is to examine the volatility in Indian stock market with respect to Gross Purchase & Gross Sales of equity and debt by FIIs for the period January 2002- September 2017. To measure the effect on Indian Stock Market by FIIs or vice versa, Johansen Co integration test, Vector auto-regression (VAR), vector error correction model (VECM), Granger Causality test are used. The innovation or shock effect on gross purchase of equity is highly affected by variation of Sensex in short run with 11.6% and 11.67% in long run. Further, gross sale of equity is affected due to variation in Sensex which is 22.197% & 22.6% in short and long run respectively. The result come ups with the long term co integration between variables and the Indian stock market returnsaffects FIIs. The gross purchase of debt put very less effect on Sensex in short as well as in long term with 0.30% and 0.90%. The effect of gross sale of debt is also very less in short run and long run. The study thus reveals that there is an effect of sale and purchase of equity on Sensex whereas impact of debt is very less.