Net FII Flows into India: A Cause and Effect Studyshodhganga.inflibnet.ac.in/bitstream/10603/19891/17/17_publications.pdf · policies of the host government towards foreign investment,

ASCI Journal of Management 41 (2): 107–120Copyright © 2012 Administrative Staff College of India

MARAM SRIKANTH* and BRAJ KISHORE**

Net FII Flows into India: A Cause and Effect Study♣

Introduction

Many developing countries, including India, restricted the flow of foreign capitaltill the early 1990s and depended on external aid and official developmentassistance. Later, most of the developing countries opened up their economiesby dismantling capital controls with a view to attracting foreign capital,supplementing it with domestic capital to stimulate domestic growth and output.Since then, portfolio flows from foreign institutional investors (FII) haveemerged as a major source of capital for emerging market economies (EMEs)such as Brazil, Russia, India, China and South Africa. Besides, the surge inforeign portfolio flows since 1990s can be attributed to greater integration amonginternational financial markets, advancement in information technology andgrowing interest in EMEs among FIIs such as private equity funds and hedgefunds so as to achieve international diversification and reduce the risk in theirportfolios.

Economic growth is a function of, among other things, capital formation. AsFII flows are a source of non-debt creating capital for the economy, manyEMEs have been competing with each other to attract such flows throughflexible investment norms/regulations or by offering fiscal sops. Further, FIIshave been assured decent returns on their investments, enabling continuousand sustainable investment flows.

FII flows into India registered substantial growth from a meagre US$4 millionin 1992–93 to over US$ 32 billion in 2010–11 (SEBI, 2011: 76). FII inflowsunderwent a sea-saw movement in India during the last decade. They registered

* Research Scholar, Part-time PhD, JNTU, Hyderabad; and Assistant General Manager, LargeCorporate Group, IDBI Bank Ltd., Specialized Corporate Branch, Chapel Road, Hyderabad(e-mail: [email protected]; [email protected]).** Former Dean, School of Management, Osmania University, Hyderabad.♣ The authors gratefully acknowledge the technical help extended by Mr. Lagesh Kumarand Mr. Kiran Kumar in writing this paper.

108 ASCI Journal of Management 41 (2) March 2012

spectacular growth especially since the middle of 2003 due to the higher growthrate in Indian GDP, robust corporate performance and an investment-friendlyenvironment. Portfolio investment flows into India turned negative (outflowof US$ 12 billion) during 2008–09 (ibid.) mainly due to the heightened riskaversion of foreign investors, emanating from the global financial meltdown.

Ever since foreign portfolio investors were allowed to invest in Indian financialmarkets in September 1992, there have been extensive deliberations on theimpact of such flows. It is said that portfolio flows from FIIs inject globalliquidity into the capital markets, raise the price-to-earnings ratios, therebyreducing the cost of capital. This, in turn, leads to further issues of equity capitaland stimulates investment growth in the host economy, apart from bringing inbest international corporate governance practices. Yet, FIIs have been targetsof criticism due to characteristics such as return chasing behaviour, herdmentality, hot money flows, short-term speculative gains and their influenceon domestic policy-making.

Though numerous research studies have been conducted in respect of FII flowsinto India, most of them have been confined to assessing the impact of suchflows on stock markets. Very few studies have focused on the overall impact ofFII flows on all segments of the Indian financial markets, viz., the capital market,the foreign exchange market, the money market and other macro-economicvariables, such as inflation, money supply and Index of Industrial Production(IIP). Given this background, it is all the more relevant to undertake a cause-and-effect study of FII flows into Indian financial markets in a holistic manner,by considering various macro-economic parameters, such as IIP, interest rates,inflation, exchange rates, apart from the BSE Sensex, so as to enable policy-makers to take informed decisions in this regard. The present study examinesthe causes and effects of FII net flows into Indian financial markets with thesupport of empirical data for the period April 2003–March 2011, i.e., a timespan of eight years, covering the period before, during and after the eruption ofthe global financial crisis.

The study is divided into seven sections, including the Introduction. The secondsection deals with the conceptual background of FII flows. Section three isdevoted to a review of literature. The fourth section explains the researchmethodology of the study. Section five delineates the trends and progress ofportfolio flows from FIIs into India. An empirical analysis of portfolio flowsfrom FIIs into India is furnished in the sixth section. The final section concludesthe study.

Srikanth and Kishore Net FII Flows into India 109

Portfolio Flows: A Theoretical Approach

Foreign institutional investor (FII) is defined as an entity incorporated outsideIndia that proposes to invest in the country and is registered as an FII underSEBI (FII) Regulations, 1995. The investment from such FIIs is treated asportfolio investment. FIIs registered with the Securities and Exchange Boardof India (SEBI) are of two types: (a) regular FIIs—those who are required toinvest not less than 70 per cent of their investment in equity-related instrumentsand up to 30 in non-equity instruments; and (b) 100 per cent debt-fund FIIs,which are permitted to invest only in debt instruments. The components ofportfolio flows into India are furnished below:

• Global depository receipts/American depository receipts (GDR/ADRs)• Foreign institutional investments from mutual funds/pension funds, etc.• Offshore funds/others

Determinants of Portfolio Flows

Foreign institutional investors are attracted by the economic and politicalstability of the host country, prospects of its growth opportunities, and favourablepolicies of the host government towards foreign investment, privatization,taxation, etc. An enabling environment—such as good governance practices(country’s rank in corruption index), an enforceable legal machinery, betteradministrative efficiency, a suitable regulatory regime and a positive investmentclimate—is an impetus for FII inflows. Foreign portfolio flows (mainly debt-oriented) are drawn to countries with higher domestic interest rates vis-à-visexternal rates of interest, coupled with stability in the exchange rates. Foreigninvestors are particularly interested in investing in India when the country’ssovereign credit risk rating is of higher than investment grade category.

External factors, such as lower foreign interest rates, recession/saturation abroad,herd mentality in international capital markets, a decline in the available profitopportunities, a gradual reduction in home bias in asset allocation in advancedeconomies, also play a vital role in attracting foreign portfolio investment flows.The developed economies, viz., the USA, Japan and many European countries,experienced near-zero interest rates, along with lower economic growth rates,during the last decade, which propelled investors in those countries to invest inEMEs. It is, however, not easy to determine exactly which external or internalfactors contribute to the flow of foreign capital into an economy. Empiricalresearch indicates that a combination of internal and external factors affect FIIinflows. It has been argued that FII flows pushed by external factors ratherthan pulled by domestic factors are less sustainable; even in the latter case,


sustainability of FII inflows hinges on the economic and political stability ofthe country along with its continued thrust on reforms.

Impact of FII Flows

Research indicates that portfolio flows from FIIs augment the sources of fundsfor the Indian capital markets, strengthen market liquidity and their allocativeefficiency, disseminate modern ideas in market design and sound corporategovernance practices, and expose Indian investors to modern financialtechniques and international best practices and systems. FIIs carry aninstitutional flavour in terms of market expertise and fund management byway of pooling small savings from retail investors; their main objectives aremaximizing returns and minimizing risk while keeping liquidity of theinvestments intact.

Foreign portfolio investment inflows are said to fill the gap between domesticsavings and investment, without increasing the foreign currency debt of thecountry. Even the exchange rate risk associated with such flows is borne byforeign investors. Portfolio inflows from FIIs perk up stock prices, lower thecost of equity capital, and hence encourage domestic firms to opt for freshfollow-on issues of equity capital and stimulate investment and output growthin the economy.

Equity investment, however, may not always lead to an increase in realinvestment in the private sector since the purchase of shares takes place in thesecondary market rather than in the primary market. One criticism levelledagainst a vibrant stock market is that it does not necessarily reflect the economicdevelopment of a country. Capital markets reconcile the social need forinvestment with the individual investors’ objective of risk, return and liquidity.In this process, secondary markets offer opportunities for speculation.Speculation leads to a situation where the players indulge in outguessing themarket in foreseeing changes in the short-term financial ratios. This convertsthe secondary market into a quasi-casino where people speculate on otherpeople’s speculation (Keynes, 1936).

Portfolio flows may find their way into speculative investment avenues, viz.,real estate, stock markets, and destabilize the domestic financial markets whensudden reversals of such flows take place. Such speculative flows are inherentlyvolatile; they can play havoc with the financial markets. When investors fleefrom securities markets abruptly in a herd, the prices of bonds and shares areimpacted. And when investors repatriate the redemption proceeds to their home


country, exchange rates go out of order. In such circumstances, if the ReserveBank of India intervenes to bring orderly conditions into the foreign exchangemarket, liquidity will dry up in the money markets. Hence, speculative flowsaffect all segments of financial markets—the securities market, the foreignexchange market, the money market and the credit market—since systemicrisk transmits from one market to another instantly and may lead to output andemployment losses (Subbarao, 2010).

Portfolio flows are considered as ‘hot capital’ and move at short notice fromone financial centre to another in search of the highest economic returns andstable market conditions. Even if the domestic financial market conditionsremain unaltered, portfolio flows may move to other markets because of thepresence of better market conditions elsewhere. FIIs are known as fair-weatherfriends; and portfolio flows will exhibit unidirectional moves in high volumesat the slightest hint of any change in economic policy, market conditions or thepolitical environment. As the Indian capital market is relatively thin due to alower retail investment base (less than 10 per cent), FII inflows will have asignificant effect on the movement of stock prices. Besides, a sudden surge inportfolio inflows could lead to ‘easy money’ conditions (softening of interestrates) and a consumer-centric economy; and the resultant excessive liquidityin the banking system may be directed towards riskier areas.

Review of Literature

As the present study is focused on portfolio flows from FIIs, an attempt hasbeen made to review the existing literature in this area, which is replete withnumerous research studies. Bakaert and Harvey (2000) found a positiverelationship between portfolio flows and the growth rate of an economy. Theyalso found that across a range of specifications, the cost of capital alwaysdecreases after capital markets are liberalized, with the effect varying between5 and 75 basis points (p. 596). Further, they found a small but mostlyinsignificant increase in the volatility of stock returns following the liberalizationof capital markets. Froot, O’Connell and Seasholes (2001) found thatinternational capital flows “predict” price changes, i.e., lead changes in theprices of securities. They observed that a 1 basis point shock to internationalportfolio flows results in a 40 basis point increase in equity prices (p. 186).

Chakrabarti (2001) conducted the pair-wise Granger Causality tests betweenFII inflows and returns on the BSE National Index. He found that portfolioinvestment from FIIs was more an effect than a cause of market returns inIndia. Mukherjee, Bose and Coondoo (2002) studied the cause-and-effectrelationship between FII flows and returns on the Indian equity market. They


found that FII flows to and from the Indian market tend to be caused by returnsin the domestic equity market and not the other way round. Gordon and Gupta(2003) found that FII inflows display seasonality and are significantly higherin the first four months of each calendar year, reflecting funds earmarked fortax saving investments and year-end bonuses. This trend can be attributed tothe presentation of a generally reform-oriented Union Budget by theGovernment of India in the month of February every year. Kohli (2003)examined how foreign capital flows affected macro-economic variables duringthe period 1986–2001. She found that foreign capital inflows have a significantimpact on domestic money supply (M3), stock market growth, liquidity andvolatility.

Roy (2007) explored the basic motives behind foreign portfolio capital flowsinto India. He found that they are primarily driven by capital gains, and in theIndian case, by the change in stock prices. The study further revealed thatstock prices are causing net foreign portfolio inflows and not vice-versa. Further,he found bi-directional causality between the exchange rate and net foreignportfolio inflows. Verma and Prakash (2011) found that the interest ratesensitivity of FII flows is not statistically significant and concluded that theBSE Sensex is a major pull factor for these flows into the domestic financialmarkets.

Research Methodology

An attempt has been made through the present study to explain the causes andeffects of foreign portfolio flows into the Indian economy between April 2003and March 2011. The period has been chosen as FII flows into India havewitnessed exponential growth since April 2003 and reached the all-time peaklevel of US$ 32 billion during 2010–11.

Since the Securities and Exchange Board of India (SEBI) is the regulatoryauthority with regard to portfolio flows from FIIs, the data on such flows hasbeen taken from its website. Monthly data in respect of other macro-economicvariables such as the BSE Sensex, Index of Industrial Production (IIP-proxy togross domestic product), wholesale price index (WPI), weighted average callmoney interest rates (INTR), foreign exchange reserves (FR), average USD/INR exchange rate (ER), forward premium (three-month FP) and money supply(M3) are considered for the purpose of the study. The entire data has beensourced from the RBI in respect of all the variables except FII inflows, whichhave been obtained from SEBI.


The paper has attempted to study the impact of portfolio inflows from FIIs onthe Indian financial markets and other macro-economic variables through thepair-wise Granger Causality tests. The tests have been conducted betweenportfolio inflows from FIIs and macro-economic variables such as WPI andIIP to establish the linkages between them. As the data are time series in nature,the variables are tested for ‘stationarity’ by using the Augmented Dickey–Fuller(ADF) test.

The Granger Causality test depicts the causality between two variables whenboth influence each other. If X causes Y, then changes in X should precedechanges in Y. Here, two conditions should be met. First, X should help to predictY. That is, in a regression Y against past values of Y, the addition of past valuesof X as independent variables should contribute significantly to the explanatorypower of the regression. Second, Y should not help to predict X. The reason isthat if X helps to predict Y and Y helps to predict X, it is likely that one or moreother variables are in fact causing both X and Y. The test is based on thefollowing regression equations:

Where p is the number of the optimum lag length, and u1t and u

2t are residuals

in the regression estimation. It is assumed that disturbances u1t and u

2t are not

correlated with each other. It is well known that the Granger Causality test issensitive to the choice of lag length. To avoid this problem, the Schwarzinformation criterion (SIC) has been applied to choose the optimum lag length.

To evaluate whether each of these two conditions hold, the null hypothesisshould be that one variable does not help to predict the other. For this, the twosets of regression equations and their corresponding null hypotheses are asfollows:

1. Here the null hypothesis is that X does not cause Y. For this Y is regressedagainst lagged values of Y and lagged values of X, and then regress Yonly against lagged values of Y;

2. Here the null hypothesis is that Y does not cause X. For this X is regressedagainst lagged values of X and lagged values of Y, and then regress Xonly against lagged values of X.


The above hypotheses are tested based on F-test statistics calculated for thenormal Wald test on coefficient restrictions.

Trends and Progress of FII Flows into India

India’s capital account has been liberalized over the years with a carefullycalibrated approach, so as to attract long-term, non-debt creating capital inflowsand discourage short-term and volatile flows into the country, while easingrestrictions on capital outflows in a non-disruptive manner. FIIs have beenallowed to invest in Indian debt and equity markets since September 1992based on the recommendations of the High-Level Committee on Balance ofPayments headed by Dr. C. Rangarajan in 1993. The Committee on CapitalAccount Convertibility (CAC) headed by Mr. S. S. Tarapore, in its Report(May 1997), also suggested relaxation of foreign investment flows into India.Over a period of time, the investment norms for FIIs in India have been relaxed.The details of investment flows from FIIs into India during the last decade arefurnished in Table 1 below.

Table 1: Portfolio Flows into India

Financial Year Net Inflows from FIIs (in US$ Mn)

2001–02 1,8392002–03 5662003–04 10,0052004–05 10,3522005–06 9,3632006–07 6,8212007–08 16,4422008–09 -9,8372009–10 30,2532010–11 32,226

Source: SEBI (2011: 76).

The table reveals that net investment flows from FIIs significantly contributedto India’s balance of payments (BoP) during the period of the study. This isevident from the fact that the country received net portfolio flows of US$ 106billion during the last decade, reflecting the growing international investors’confidence in India’s growth story. Net inflows from FIIs, however, experienceda roller-coaster ride during the above period. Net FII inflows turned negative(net outflow of around US$ 10 billion) for the first time during 2008–09 mainlydue to the global financial meltdown, which made foreign investors risk-averseand flee the country.


Net investment flows from FIIs were around US$ 2 billion during 2001–02.The figure increased by more than 16 times and crossed US$ 32 billion during2010–11, the highest so far in the history of the Indian capital market. Thesharp rise in FII flows into India may be attributed to factors such as FIIs’search for higher yields in view of lower real returns in the advanced economies,coupled with India-specific factors, viz., strong macro-economic fundamentals,a deep, liquid and buoyant capital market, a diversified product portfolioincluding derivatives, a resilient financial sector, a sound regulatory regime,efficient payment and settlement systems, advanced risk management practices,robust corporate financial performance, and the relatively attractive P-E ratios.

Impact of Net FII Inflows: An Empirical Analysis

Initially, correlation co-efficients were computed to understand the relationshipbetween net FII inflows and other variables. The correlation matrix is presentedin Table 2.

Table 2: Correlation Co-efficient Matrix between Net FII Inflows and Other Variables

Variables DBSE DDIIP DDM3 DER DFP DFR DWPI FII INTR

DBSE 1.0000

DDIIP 0.0347 1.0000

DDM3 -0.0600 0.3578 1.0000

DER -0.5708 0.1663 0.0408 1.0000

DFP -0.0500 -0.0461 -0.0147 -0.1779 1.0000

DFR 0.4605 0.0740 0.1413 -0.4650 0.0163 1.0000

DWPI -0.0448 -0.2232 -0.0880 -0.0083 0.0881 0.0693 1.0000

FII 0.5693 0.0764 0.0409 -0.5176 0.0134 0.3953 0.0598 1.0000

INTR -0.3558 0.1068 0.0580 0.2073 0.1832 -0.1865 -0.0765 -0.3096 1.0000

Notes: D refers to ‘differenced variable’ to address ‘stationarity’ issue in the time series data.

DBSE: BSE Sensex; DDII: Index of Industrial Production; DDM3: Money supply (M3);DER: USD/INR exchange rate; DFR: Foreign exchange reserves; DWPI: Wholesale priceindex; FII: Foreign institutional investors’ flows into India; INTR: Weighted average interestrates in the Indian call money market.

It was found that net FII inflows and the BSE Sensex showed a significantpositive correlation. It was further observed that there was good co-movementbetween FII inflows and foreign exchange reserves since India balances itscurrent account deficit (CAD) on the one hand, and the foreign exchange kittyon the other hand, with the help of foreign currency inflows.


Further, a strong negative correlation was found between net inflows from FIIsand the USD/INR exchange rate (since USD is the base currency). Huge inflowsfrom FIIs make the USD surplus in the Indian market, resulting in depreciationof the greenback against the Indian rupee. Interest rates in the call/notice moneymarket exhibited an inverse relationship with net FII inflows since foreigninvestment supplements domestic capital and, to that extent, domestic firmsneed not exclusively depend on funds from the Indian money markets. It maybe borne in mind that FIIs are also allowed to invest in Indian debt securities.

Apart from the above, an indirect relationship was found between the BSESensex and the USD/INR exchange rate, indicating that massive flows fromFIIs into India exert downward pressure on the USD and upward pressure onthe INR. Similarly, a negative correlation was observed between foreignexchange reserves and exchange rates (USD is the base currency, and INR getsa boost due to the accumulation of higher foreign exchange reserves). Further,there was good co-movement between the BSE Sensex and foreign exchangereserves, which supports the underlying theory that as more and more foreignexchange is added to the reserves, the same will be reflected in the growth ofthe stock market.

Since the financial data are time series in nature, the variables were tested for‘stationarity’ by using the Augmented Dickey–Fuller (ADF) test. The resultsof the ADF test are shown in Annexure 1. Subsequently, the pair-wise GrangerCausality tests were conducted. The results are presented in Table 3.

It can be inferred from Table 3 that there was a bi-directional causality betweennet FII inflows and the BSE Sensex, with the variables mutually reinforcingeach other during the period of the study, i.e., April 2003–March 2011. Withnet FII flows into India growing rapidly since April 2003, the BSE Sensex alsoexhibited a similar trend (from 3037 in April 2004, it rose to 18457 in March2011) in its movement during the period of the study. As the BSE Sensex is abellwether index and considered to be a barometer of Indian economic growth,FIIs are attracted further to invest in India based on the performance of thestock index.

It was found that net FII inflows Granger caused foreign exchange reservessince the latter is an outcome of sterilization of foreign exchange inflows fromFIIs. Foreign investors find the Indian economy to be a safe investment havenas long as the country has an ample level of foreign exchange reserves reflectingIndia’s international creditworthiness. It was observed that interest rates causednet FII flows into India during the period of the study since the interest rate


differential (for instance, between India and the US, especially with regard todebt instruments) offered arbitrage opportunities for foreign investors for furtherinvestment. It was noticed that IIP caused investment inflows from FIIs sincethe growth in the index boosts market confidence.

Table 3: Results of Pair-Wise Granger Causality Tests

Hypothesis F-Statistics Significance Inference Level

1. FII does not Granger cause IIP 1.60854 0.1801 –

2. IIP does not Granger cause FII 2.56035 0.0447 IIP causes FII

3. FII does not Granger cause WPI 1.68140 0.1622 –

4. WPI does not Granger cause FII 0.24601 0.9113 –

5. FII does not Granger cause weightedaverage call money interest rate 0.32663 0.8594 –

6. Weighted average call money interestrate does not Granger cause FII 3.69637 0.0081 –

7. FII does not Granger cause averageexchange rate of USD/INR 0.97075 0.4281 –

8. Average exchange rate of USD/INRdoes not Granger cause FII 1.59759 0.1828 –

9. FII does not Granger cause foreign 2.47444 0.0506 FII causes foreignexchange reserves exchange reserves

10. Foreign exchange reserves do not 0.52647 0.7166 –Granger cause FII

11. FII does not Granger cause 0.78400 0.5388 –forward premium

12. Forward premium does not 1.95783 0.1087 –Granger cause FII

13. FII does not cause broad 0.65519 0.6249 –money supply (M3)

14. M3 does not Granger cause FII 0.41669 0.7962 –

15. FII does not Granger cause BSE Sensex 2.21791 0.0741 FII causes BSE Sensex

16. BSE Sensex does not Granger cause FII 2.14239 0.0829 BSE Sensex causes FII

Non-existence of the cause-and-effect relationship was observed between netFII inflows and other variables such as WPI, exchange rate and forwardpremium. Most FII flows into the Indian capital market are towards the purchaseof equity shares/mutual funds and to some extent towards debentures; moreover,foreign investors are free to repatriate funds out of India as and when theychoose to. Hence, net FII inflows have little impact on forward premium.


Similarly, they do not significantly cause exchange rate in India, since exchangerates are determined by various other factors, viz., BoP, differentials of inflationand interest rates, crude oil prices. It was also found that net FII inflows do notcause inflation since India suffers from supply-side constraints rather thanexcessive liquidity alone.

Conclusion

Economic growth is a function of, among other things, capital formation.Portfolio inflows from FIIs inject global liquidity into capital markets and raisethe price-to-earnings ratios, thereby reducing the cost of capital. This leads tofurther issues of equity capital and stimulates investment growth in the hosteconomy apart from bringing in best corporate governance practices. FII inflowsoffer dual advantages, i.e., they are a source of non-debt creating capital flowinto the economy and the exchange rate risk is borne by the foreign investor.Yet, FIIs have been targets of criticism for characteristics such as return chasingand herd behaviour; hot money inflows; short-term, speculative gains; andtheir influence on domestic policy-making.

The empirical study for the period April 2003–March 2011 revealed that therewas bi-directional causality between net FII inflows and the BSE Sensex—which mutually reinforced each other. Net FII inflows resulted in theaccumulation of foreign exchange reserves, thereby enhancing India’s imagein international financial markets. Interest rates in India propelled FIIs to investfurther on account of the positive interest rate differential. The study also foundthat growth in the Index of Industrial Production improved market sentimentand increased net FII flows into India. On the whole, it was observed that netFII inflows had a positive impact on the Indian stock market and foreignexchange reserves. Further, higher IIP and interest rates acted as catalysts forFII flows into India. Clearly, policy-makers are encouraged to continue theexisting policy norms on portfolio investments from FIIs without anyreservations.

References

Bekaert, Geert, and Campbell R. Harvey. 2000. “Foreign Speculators and Emerging EquityMarkets.” Journal of Finance 55 (2): 565–613.

Chakrabarti, Rajesh. 2001. “FII Flows to India: Nature and Causes.” Money and Finance 2(7): 68–97.


Froot, Kenneth A., Paul G. J. O’Connell, and Mark S. Seasholes. 2001. “The Portfolio Flowsof International Investors.” Journal of Financial Economics 59 (1): 151–93.

Gordon, James, and Poonam Gupta. 2003. “Portfolio Flows into India: Do DomesticFundamentals Matter?” IMF Working Paper No. 03/20, January.

Keynes, John Maynard. 1936. The General Theory of Employment, Interest, and Money.New York: Harcourt Brace Jovanovich.

Kohli, Renu. 2003. “Capital Flows and Domestic Financial Sector in India.” Economic andPolitical Weekly, 22 February–28 February, 761–68.

Mukherjee, Paramita, Suchismita Bose and Dipankar Coondoo. 2002. “Foreign InstitutionalInvestment in the Indian Equity Market: An Analysis of Daily Flows during January1999–May 2002.” Money and Finance 2 (9–10): 54–83.

Reserve Bank of India (RBI). Various years. Report on Currency and Finance. Mumbai:RBI.

———. Various years. Handbook of Statistics on the Indian Economy. Mumbai: RBI.

Roy, Nirmal. 2007. “An Analysis of Foreign Portfolio Flows in the Context of Capital AccountConvertibility in India.” Chapter from the MPhil dissertation on “An Analysis of ForeignPortfolio Flows in the Context of Capital Account Convertibility in India”, Centre forDevelopment Studies (CDS), Trivandrum.

Securities and Exchange Board of India (SEBI). 2011. Annual Report, 2010–2011. Mumbai:SEBI.

SEBI website www.sebi.gov.in.

Subbarao, Duvvuri. 2010. “Volatility in Capital Flows: Some Perspectives.” Speech deliveredat the High-level Conference on the International Monetary System jointly organized bythe Swiss National Bank and the International Monetary Fund. Zurich, 11 May. Availableonline at: http://www.bis.org/review/r100517b.pdf.

Verma, Radheshyam, and Anand Prakash. 2011. “Sensitivity of Capital Flows to InterestRate Differentials: An Empirical Assessment for India.” RBI Working Paper Series: 7/2011, Dept. of Economic and Policy Research (DEPR), May.


Annexure 1Results of the Augmented Dickey Fuller Test

ADF Test Results t-statistic ‘p’ value

H0: ER has a unit root

ADF test statistic -2.253042 0.1894

H0: D(ER) has a unit root


H0: FII has a unit root


H0: FR has a unit root


H0: D(FR) has a unit root


H0: IIP has a unit root

ADF test statistic 0.430693 0.9832

H0: D(IIP) has a unit root


H0: D(IIP, 2) has a unit root


H0: INTR has a unit root


H0: WPI has a unit root


H0: D(WPI) has a unit root


H0: BSE Sensex has a unit root


H0: D(BSE Sensex) has a unit root


H0: M3 has a unit root


H0: D(M3) has a unit root


H0: D(M3, 2) has a unit root


Documents

Net FII Flows into India: A Cause and Effect Studyshodhganga.inflibnet.ac.in/bitstream/10603/19891/17/17_publications.pdf · policies of the host government towards foreign investment,