Foreign Institutional Investment and Stock Market Returns in India : Before and During Global Financial Crisis

Augmented Dickey Fuller and Phillips-Perron tests were employed to examine the stationarity of both the net foreign institutional investment and NSE market return series. Instantaneous Granger Causality test was also employed to examine the contemporaneous relationship between net foreign institutional investment flows and equity market returns in India for the pre-global financial crisis and during the crisis periods. By and large, our analysis revealed that there was an evidence of negative feedback trading hypothesis and positive feedback trading hypothesis by foreign investors before the global financial crisis period and during the crisis period respectively. This implies that foreign institutional investment acts as a smoothening effect and destabilizes forces before and during the crisis period respectively. However, such positive feedback trading strategies from foreign institutional investors seems to be the rationale during the period of global financial crisis