Macroeconomic Dynamics of Foreign Institutional Investment: An Indian Perspective

Abstract

Foreign Institutional Investment (FII) has emerged as an engine of economic growth of developing economies in general and Indian economy in particular as it has the potential to meet the much needed capital requirement. Though FII has flown largely to Indian market, it is not consistent and stable. FII appears to be sensitive to several global and domestic macroeconomic factors. The present study has the objective to investigate the factors contributing to the fluctuations in the FIIs. The study is based on secondary data which are collected on monthly basis from April, 2005 to December, 2016. A linear multiple regression model has been estimated with BSE Sensex, exchange rate, wholesale price index, Index of Industrial Production and 90- days treasury bill yield rate as explanatory variables and the net inflow of FII as dependent variable. The results show that exchange rate, inflation and treasury bill interest rate have significant impact on FII in India. It has been found that exchange rate has inverse relationship with the FII. This leads to the inference that appreciation of the domestic currency may discourage FII in Indian capital market. Surprisingly, inflation seems to have positive impact on FII and interest rate on treasury bill appears to be inversely related to FII. Based on the outcome of the study, it has been suggested to pursue appropriate monetary and fiscal policy measures to stabilise interest rate, inflation and exchange rate as to ensure stable FII inflow to Indian capital market which would energise and sustain Indian economy.

Keywords: FII, investment, stock market, exchange rate, IIP, inflation, treasury bill