Impact of FIIs on the Indian economy: an analysis of alternative platform to channel FIIs investments

Abstract

Given that India has been a capital sparse country, foreign investment has played a key role in filling the gap between the domestic demand for capital and the domestic savings. Domestic savings are not large enough to meet the domestic demand for investment. As per the data released by SEBI, the Foreign Institutional Investors have put in around US$ 13.23bn in to the Indian equity market in FY 2014. But the entry of FIIs in India has brought mixed consequences on the economy via money supply, interest rates and currency volatility. It is not clear whether FIIs are good for the economy in current set up as it increases volatility of different components of economy. FIIs can easily pull out investments when the conditions outside India look more favorable and their sudden withdrawal of investments results in the decline in the stock price and depreciation of rupee. Similarly when conditions look favorable in India, they invest back into the country, which leads to sudden increase in stock prices, rupee appreciation and inflation due to the increased money supply. The importance of FIIs in the Indian capital market has been growing overtime. Therefore it is important to understand the real impact these FIIs are causing to the Indian economy.