THE DETERMINANTS, SIGNIFICANCE AND IMPACT OF FOREIGN INSTITUTIONAL INVESTMENTS: AN INDIAN STANDPOINT

Shah, Karan (2010) THE DETERMINANTS, SIGNIFICANCE AND IMPACT OF FOREIGN INSTITUTIONAL INVESTMENTS: AN INDIAN STANDPOINT. [Dissertation (University of Nottingham only)] (Unpublished)

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Abstract

Ever since policymakers implemented the decision to liberalize India’s economy, allowing foreign investors to purchase assets in the Indian capital markets, India has been attracting investors globally to invest in its growth story. Since this liberalization in 1991, India has gone on to become to become an international hotspot for foreign investment , with the Indian economy going on to become the most rapidly growing economy, second only to China. Foreign Institutional Investors have played their part in boosting this economic growth by helping to finance it, and influencing the modernization and discipline of the India’s capital markets.

The present study identifies the determinants of these FII Investments and analyses the impact of these determinants on FII net investments made on the National Stock Exchange of India (NSE). The interest of this research is to test the significance of determinants like predictable and unpredictable risks, returns and inflation to investments made by FII’s over a period of 2001 to mid 2009. For this purpose, the researcher makes use of a theoretical model with combined properties of Uncovered Interest Parity (UIP) and Purchasing Power Parity (PPP), Threshold (ARCH) and the ARMA model, and applies the same to the data. This study also highlights the impacts Foreign Institutional Investors have had on the Indian markets ever since liberalization.

It has been found that FII’s bear little caution to predictable risks in India, and have continued to chase returns even in times of high levels of predicted volatility. It has also been found that equity returns in India are more of a cause of FII investments rather than being the effect. Factors such as predictable risks in global markets, and inflation levels in India significantly impact these flows. Many other factors affecting the inflow of these investments have been identified in this study such as the exchange rate, stock liquidity, ownership indicators, interest rate yields etc. Given the sizeable volume of these inflows, understanding their behavior and determinants is crucial at a time when the nation is liberalizing its capital account. It has also been found that the impact the foreign investors have had on stock market volatility

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 19 Jan 2011 10:13
Last Modified: 25 Oct 2016 23:47
URI: http://eprints.nottingham.ac.uk/id/eprint/24229

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