Causal Relationship between Foreign Institutional Investments, Exchange Rate and Stock Market Index i.e. Sensex in India: an Empirical Analysis

Abstract

Since the global crisis (2008) emerged in the world economy, the inflows of foreign investors increased in developing countries and India was not the exception in terms of huge investment by foreign investors. India’s capital market recognized as an emerging market in the world and growing fast since the economic liberalization and globalization in 1991. Since 1993, when liberalization policies came in to effect and Indian market opened for foreign investment, the FIIs become the driving force for the overall development of economy as well as pose threat in the development. This paper attempts to analyze the impact of currency fluctuations on the investment by the foreign investment investors, for analyzing the impact and causal relationship, Augmented Dickey-Fuller test and Granger Causality test has been applied, and for analyzing FIIs role in the development of Indian capital market linear regression model has been used. After applying the Granger Causality test, we found that FII granger causes Exchange rate. As far as causality relationship is concerned, a unidirectional causality or one-way causality is found from FII towards exchange rate. As far as the causal relationship between the FIIs and SENSEX, FII are only responsible for up to 45.4%. This means that whatever changes have happened in the SENSEX for period under study the FI investments are responsible up to 45.4%. This implies that there are many other macro-economic factors which have indirectly affected the SENSEX in India.

Keywords: FIIs, SENSEX, INRUSD, BSE, Volatility, GDP, RBI, FDI

Causal Relationship between Foreign Institutional Investments, Exchange Rate and Stock Market Index i.e. Sensex in India: an Empirical Analysis