Determinants of Foreign Institutional Investor's Investment in India

This study investigates the determinants of foreign institutional investors' Investment in Indian by finding the relationship between the foreign institutional investment and financial and real economy variables namely, return on NIFTY, volume of NSE, index of industrial production, wholesale price index, and exchange rate and call money rate over the period from January 2007 to March 2014. Johansen's co-integration and vector error correction model have been applied to explore the long-run equilibrium relationship between FII's investment and macroeconomic and financial variables. The analysis reveals that the FII's investment in India & variables under the study are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed from the VECM that in the long-run, the relationship between the FII investment in India and return on NIFTY index of NSE, index of industrial production, exchange rate and call money rate are positive. In the Granger causality sense, FII's investment in India causes WIP, Exchange Rate causes FII's investment and there is bidirectional causality exists between FII's investment and index of industrial production. Furthermore, it is observed form the findings of VECM and Granger Causality test that FII's investment creates a long run relationship with return on NIFTY index of NSE, exchange rate and call money rate but in short run no causality found between them