FII Flows and Stock Market Capitalization in India

Abstract

The portfolio investment by Foreign Institutional Investors (FIIs) has become a remarkable force behind the development of Indian stock market and is majorly perceived as achief cause of stock market volatility. This has attracted numerous of researchers to study the relationship between FIIs Portfolio flows and volatility in stock market of India. In order to ascertain the relation between FIIs portfolio flows and stock market volatility the impact study of market capitalization and FIIs inflows and outflows relationship has been established .The study is conducted using monthly time series of NIFTY, SENSEX and FIIs activity for a period of sixteen years spanning from January, 2001 to December, 2016. To check the non-stationarity of the time series the Augmented Dickey-Fuller (ADF) unit root test is applied. In addition to these tools, granger causality Test is also used to study the impact of FIIs (Buy/Sell/Net) capital flows on stock market capitalization and vice versa. The study reveals that there is significant relationship between FIIs capital flows and stock market capitalization. Moreover, BSE and NSE market capitalization have significant influence on FII flows.