Role of the FIIs in the Development of the Indian Stock Market: An Econometric Analysis

Abstract

The stock market of a country operates in the economy of that country and the economic conditions of the country affect the stock prices of the stocks listed in the stock exchanges of the country. And it is believed that macroeconomic variables of a country and the stock prices of the stocks listed in the stock exchanges of the country are co-integrated. In this paper, in the context of India, the relationship of 8 macroeconomic variables with the stock market was examined. These variables are IIP, WPI, Gold Price, M3, Call Money Rate, FIIs Investment, Real Effective Exchange Rate and Foreign Exchanges Rates. Two periods have been taken for the study, 1991 to 2002 and 2003 to 2016. 1991 to 2002 saw a flat stock market growth and 2003 to 2016 saw exponential growth. The credit of this exponential growth in the latter period is given to the Foreign Institutional Investors Investments (FIIs). By employing the Bi-variate Johansen Co-integration Test, Granger Causality Test and the Step-wise Regression, it was concluded that during 1991 to 2002 no macroeconomic variable affected the stock market in the long-run and during 2003 to 2016 only FIIs were able to influence the stock market in the long-run.