Impact and influence of foreign institutional investors and mutual funds on Indian capital markets

Abstract

1. Abstract It is a popular belief that the volatility and movements in the Indian stock market in the past few years have been driven by many factors including inflows from foreign institutional investors and mutual funds. The main purpose of this study is to investigate, with recent data, the empirical evidence of impact of FIIs and MFs on Indian capital markets. A second purpose of the study is to validate the hypothesis that FIIs and MFs move asynchronously. The reason for raising this as a research question is that there is a general belief that when FIIs start selling, the market dips and at that point MFs move in to buy. Then, FIIs come back later on a buying spree and push up the markets, with the MFs benefiting from that upward movement. Using data from January 2003 to July 2007, it was found that FII and MF movements though are slightly negatively correlated. However, in shorter periods of time, like in the budget week the inverse relationship is more pronounced. The study further examines if the movements in the stock market is impacted by global factors like performance of other developed and emerging markets, Fed rates and crude oil prices. Multivariate analysis was carried out using Factor analysis (Principal component analysis).The regression results show that a combination of global and domestic macroeconomic factors is significant in determining the Nifty movements. Amongst the factors that were considered for multivariate analysis, it was found that the effect of the international financial market indices (both developed and emerging) is quite pronounced on the movements of the Nifty. This is direct fallout of globalization and it is quite evident that capital markets are no longer influenced merely by domestic parameters. The FIIs net inflows do not have a significant impact on the Indian stock market index movements. Hence, the general perception that the markets fare well when FIIs are net buyers and that markets begin to tank when they go on a selling spree is not a well- founded concern.