FII Flow and Indian Stock Market : A Causal Study

In the age of global capitalism, substantial amounts of capital are flowing from developed economies to emerging economies like India. An important feature of the development of Indian stock market has been the escalating participation of Foreign Institutional Investors (FIIs) in the last 15 years. This paper tries to examine the direction of causality between flow of foreign institutional investment (FII) and Indian stock market returns i.e. whether FII flows causes variations in stock market returns or vice versa. Using monthly data of FII inflow, outflow, BSE Sensex and Nifty returns from April 2007 to October 2013, Granger-causality approach in a bi-variate VaR framework has been used to investigate the causality between FII flow and stock market returns. Augmented Dickey Fuller (ADF) test has been used to test whether the data is stationary or not. The outcome of the study was there is a bi-directional causality between FII movements and stock market returns