Informatics Publishing Limited

Shikha Menani

Abstract

Investment plays an important role in accelerating economic growth of any economy. Indian economy opened up to the global world in 1991 by allowing foreign investors to make investments in India. The foreign investments can be made either in the listed companies through financial markets (called Foreign Institutional Investors) or by directly investing capital in the listed/unlisted companies in India (called Foreign Direct Investment). Foreign investment complements the domestic investments by increasing economic activities and capital formation, thus bringing with it new technology advance, making the domestic market more competitive. Foreign institutional Investors (FIIs) only aid the domestic investment by increasing capital inflows through the secondary markets and are very volatile. Foreign Direct Investment (FDI) plays more important role than FIIS in progress of any developing country especially like India. India has been projected as the second most important FDI destination after China for transnational corporations during 2010-12. FDI provides not only inflow of foreign funds and investments but also transfer of advanced technology and skills, thus creating job opportunities. Although both types of foreign investments provide an impetus for economic and industrial expansion, however India should focus more on attracting FDI as it stays for longer period, for its exist policy is not as easy as for FIIs. Availability of highly qualified human resource, huge untapped potential domestic markets, low-cost manufacturing, makes India a favorable destination for foreign investors. The present paper tries to do a comparative analysis of FDI and FII and their contribution towards economic growth. For the data and methodology, the time series analysis is applied on the time period from 2000 to 2012.

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Anuradha Agarwal ¹, Shikha Menani ¹

Affiliations
1 Delhi University, Delhi, IN

Abstract

Foreign Institutional Investors have been instrumental in increasing the volume of trading in the Indian stock market since its beginning in the 1990’s. Prior to that there was no or very less movement in the stock markets because of lack of funds and activity. It was the introduction of foreign institutional investors that brought the much needed liquidity to the stock market of the country. On the other hand there is another form of institutional investor that is domestic in its origin and it is the domestic institutional investor. The present paper tries to examine the role of FIIs and DIIs in the volatility of the Indian stock market proxied by Bombay Stock Exchange. Daily data for the period 2007-2016 has been taken to analyze the impact of foreign investors and domestic investors on the stock market. To check the non-stationarity of the time series the Augmented Dickey-Fuller (ADF) unit ischolar_main test has been used and further statistical tools like mean, variance, standard deviation, skewness are used to examine the impact of institutional investors on Indian stock market volatility. Further Granger Causality and GARCH Modelling has been used to further strengthen the results. The study also tries to find out whether the movement of the two types of investors is in the same direction or in the opposite direction thereby reducing the volatility which would have been otherwise there in the absence of two opposite institutional investors.

Keywords

Causality, Domestic Institutional Investors, Foreign Institutional Investors, Garch, Volatility.

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