Determinants of foreign portfolio investment and their effects on the Indian stock market

This article aims at focusing on the facts in the financial series of Foreign Portfolio Investment (FPI) and its determinants. The study considers Exchange Rate, Consumer Price Index, Index of Industrial production, SENSEX, NIFTY and Foreign Exchange Reserve as determinants.
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Determinants of foreign portfolio investment and their effects on the Indian stock market International Journal of Management (IJM) Volume 8, Issue 3, May– June 2017, pp.105–115, Article ID: IJM_08_03_011 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=3 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication DETERMINANTS OF FOREIGN PORTFOLIO INVESTMENT AND THEIR EFFECTS ON THE INDIAN STOCK MARKET S. Raghavan Ph. D Research Scholar in Commerce, Alagappa University, Karaikudi, India Dr. M. Selvam Research Guide, International Business, Alagappa University, Karaikudi, India ABSTRACT This article aims at focusing on the facts in the financial series of Foreign Portfolio Investment (FPI) and its determinants. The study considers Exchange Rate, Consumer Price Index, Index of Industrial production, SENSEX, NIFTY and Foreign Exchange Reserve as determinants. The FPI regime commenced on June 01, 2014 to harmonize different routes for foreign portfolio investments i.e. Foreign Institutional Investors (FIIs), Sub Accounts and Qualified Foreign Investors, uniform entry norms, adoption of risk based know your customer (KYC) norms etc. The monthly Data of variables were collected from the websites, addressing bseindia.com, https://in.investing.com /indices/s-p-cnx-nifty-historical-data, stats.oecd.org, SEBI and www.rbiindia.com for the period from Jun 2014 to Dec 2016. The effect of Foreign Portfolio Investment (FPI) is analysed with its determinants for Correlation, Co-integration and Casual relationships for the period after the introduction of the FPI Regime. The first order differences of the variables were tested. The Co-Integration test gives the existence of one Co- integrating variable vector in the equations. The Equation at none shows the p-value of 0.000 in both trace and Lmax test and confirming one co-Integrating vector and there is a long- run relationship among variables and hence the null hypothesis of no Co-Integration is rejected. The Granger causality gives the result that we can accept the null hypothesis that FPI does not granger cause and effect ER. But the null hypothesis is rejected that ER does not cause and effect FPI and there is a unidirectional relationship between the variables. There are no causalities between FPI and CPI/IIP/SENSEX/NIFTY/FER and vice-versa. The study has suggested that though FPI has many advantages to the country but it should have certain limit that should not lead to inflation where the prices may go up. Key words: ER, SENSEX, NIFTY, CPI, IIP, FER, FPI http://www.iaeme.com/IJM/index.as 105 editor@iaeme.com Determinants of Foreign Portfolio Investment and Their Effects on The Indian Stock Market Cite this Article: S. Raghavan and Dr. M. Selvam, Determinants of Foreign Portfolio Investment and Their Effects on The Indian Stock Market. International Journal of Management, 8(3), 2017, pp. 105–115. http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=3 1. INTRODUCTION Security Exchange and Board of India (SEBI) constituted a “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments” (the Committee), under the Chairmanship of Shri K. M. Chandrasekhar, comprising representatives from Government of India, Reserve Bank of India and various market participants. The Committee made recommendations regarding harmonization of different routes for foreign portfolio investments i.e. Foreign Institutional Investors (FIIs), Sub Accounts and Qualified Foreign Investors, uniform entry norms, adoption of risk based KYC norms etc. The Board, in its meeting held on June 25, 2013 accepted the recommendations of the Shri K.M. Chandrasekhar Committee. SEBI (Foreign Portfolio Investors) Regulations, 2014 In order to implement the recommendations of the Committee, the SEBI (Foreign Portfolio Investors) Regulations, 2014 (the Regulations) have been framed and the same have been notified on January 07, 2014. The FPI regime shall commence from June 01, 2014. Salient features of the Regulations are as under: Major Salient features of the SEBI (Foreign Portfolio Investors) Regulations, 2014 Foreign Portfolio Investors (FPIs) 1. Existing Foreign Institutional Investors, Sub Accounts and Qualified Foreign Investors (QFIs) shall be merged into a new investor class termed as “FPIs”. 2. SEBI approved Designated Depository Participants (DDPs) shall register FPIs on behalf of SEBI Subject to compliance with KYC requirements. 3. FPI shall be required to seek registration in any one of the following categories: • “Category I Foreign Portfolio Investor” which shall include Government and Government related foreign investors etc; • “Category II Foreign Portfolio Investor” which shall include appropriately regulated broad based funds, broad based funds whose investment manager is appropriately regulated, university funds, university related endowments, pension funds etc; • “Category III Foreign Portfolio Investor” which shall include all others not eligible under Category I and II foreign portfolio investors. 4. All existing FIIs and Sub Accounts may continue to buy, sell or otherwise deal in securities under the FPI regime. 2. REVIEW OF LITERATURE Kumar (2001) investigated the effects of FII inflows on the Indian stock market represented by the SENSEX using monthly data from January 1993 to December 1997. Kumar (2001) inferred that FII investments are more driven by Funda ...