Foreign Institutional Investments & Its Impact on Sensitive Index

[Submitted by Mr. Ankit Doshi,
MMS student,
Mumbai, Maharashtra]

April 9, 2008


After the Indian Stock Markets were opened to Foreign Institutional Investors in 1992, substantial funds started pouring into our stock markets. Though there was lukewarm from FIIs during the initial two years, the number of FIIs participating in the Indian Stock Market kept on growing and currently there are about [.] FIIs operating. Factors like introduction of Dematerialization of shares, rolling settlements, online trading and trading of derivatives have attracted FIIs towards India.

Foreign Institutional Investors (FIIs) found green pastures in Indian. Their estimations about the Indian Stock Market have been that most of our stocks are undervalued. The number of FIIs has been growing in recent years. The reforms brought in by the SEBI were and have been very encouraging for the FIIs to pour in foreign investment into our stocks markets.

In most situations, the FIIs net inflow into the stock market has been one of the major reasons for the Sensex scaling consistently greater heights in the recent past. For Instance, if Federal Reserve cuts the rate by few basis points than FIIs who wait for the FED's decision, after the rate cut will park their funds in better investment avenues where they can get a better risk adjusted returns. India being one of the favorite destinations to park funds to FIIs, these funds comes to India thus increasing the value of SENSEX as well as NIFTY.

Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors (FIIs).
The number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (Sebi) has increased to 1,219 at the end of 2007 as against less than 1000 at the end of 2006. The registered sub-accounts of these FIIs also went up significantly to 3,644.

FIIs showed huge interest in 2007, pumping in the highest ever net investment of US$ 17.2 billion in the equity markets and were instrumental in the BSE and NSE clocking record index levels of over 20,000 and 6,000 respectively. In fact, during the year, FIIs were net buyers in 10 out of 12 months, turning net sellers in the rest primarily to make up the losses on account of the sub-prime crisis in the US.

Out of the total net inflows, a whopping 70 per cent was invested through the instruments of FCCBs, QIPs and IPOs. The remaining 30 per cent was invested through overseas offers, preferential offers and conversion of warrants.

This surge in FII investment has led to the cumulative net investments by FII in to Indian equities to total US$ 66.8 billion by the end of 2007, since December 1993, when FIIs were allowed to enter India.

Simultaneously, the up gradation of India's sovereign ratings combined with the improvement in the macro economic situation and growth fundamentals has led to a near tripling of FII investments in the debt market. Total investment in the country's debt market till November amounted to US$ 1.596 billion as against US$ 487 million in the corresponding period in 2006.

This is a clear index of how bullish this category of investors has been on the prospects of the Indian market.

OBJECTIVES of the study

Primary Objective - Educate readers about FII and how can it impact Indian Stock Market.

Secondary Objective - To provide a practical framework that enables readers to comprehend and develop perspectives of their own.


The study is Descriptive as well as Analytical. Along with the concepts, efforts have been made to analyze the current market scenario.

Analysis part

  1. Correlation between FIIs' net investment and its affects that can be seen on Returns on Sensex. In the whole analysis the terms Indian Equity Markets or Indian Stock Markets and Sensex are used interchangeably.
  2. Simple Regression Analysis and SLR Chart to find the regression equation.
  3. Auto Correlation & Run Tests to find the efficiencies of market in weak form.

Foreign Institutional Investors- Overview

In response of the recommendations of the Narasimham Committee Report on Financial system, during September 1992, the GOI decided to open the country's stock markets to direct participation by the FIIs. In simple terms, FII means an entity established or incorporated outside India and is proposing to invest in India.

The applicants are allowed to participate as:

  • Pension Funds
  • Mutual Funds
  • Investment Trust
  • Insurance or reinsurance companies
  • Endowment Funds
  • University Funds
  • Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and
  • Asset Management Companies, Nominee Companies, Institutional Portfolio Managers, Trustees, Power of Attorney Holders, Banks who propose to invest their proprietary funds or on behalf of "broad based" funds or on of foreign corporate and individuals.

Besides investing on their own behalf, they are allowed to invest on the behalf of foreign companies, foreign individuals and institutions, funds or portfolio established or incorporated outside India, in which case they are called as Sub-Accounts.

Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India.

The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India.

The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing a resolution to that effect.

The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to:

- the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and

- the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company.

Investments by FIIs

Areas of Investment

Foreign Institutional Investor may invest through 2 routes:

  1. Equity Investment route
    100% investments could be in equity related instruments or upto 30% could be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments)

  2. 100% Debt route
    100% investment has to be made in debt securities only

Equity Investment route

In case of Equity route the Foreign Institutional Investor can invest in the following instruments:

  • Securities in the primary and secondary market including shares which are unlisted, listed or to be listed on a recognized stock exchange in India.
  • Units of schemes floated by the Unit Trust of India and other domestic mutual funds, whether listed or not
  • Warrants

100% Debt route

In case of Debt Route the Foreign Institutional Investors can invest in the following instruments:

  • Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)
  • Bonds
  • Dated government securities
  • Treasury Bills
  • Other Debt Market Instruments

Foreign corporates and foreign individuals shall not be eligible to invest through the 100% debt route.

Investment Limits

A Foreign Institutional Investor (investing on own behalf) or a sub account can hold upto 10% of Paid-up Equity Capital of any Company. The total investment made by all the foreign corporates and foreign individuals shall not exceed 5% of the total issued capital of that company within the aggregate limit for FII portfolio investments. The total investment by Foreign Institutional Investors and Sub accounts in any Indian Company cannot exceed 24% of its total Paid-Up Capital.

However, in certain companies, which have passed a special resolution in this regard, the total Foreign Institutional Investor Investment can be made upto 49% of Paid-Up Capital. This limit of 24% / 49% is exclusively available for investment by Foreign Institutional Investors only.

This 24% limit does not include investments made by the Foreign Institutional Investors outside the Portfolio Investment route, i.e. through the direct investment approval process. Investments made offshore through purchases of GDRs, ADRs and Foreign Currency Convertible Bonds are also excluded.

Reserve Bank of India monitors the overall investment limit. When the overall Foreign Institutional Investors investment level reaches 22% in a company, Reserve Bank of India gives a caution notice. Subsequently, all purchases have to be done by prior approval of Reserve Bank of India. For companies with Foreign Institutional Investors investment limit of 49% this caution notice is given at 47%. The Reserve Bank of India does monitoring of company wise investment limits.

The 100% Route

Foreign Institutional Investors can make 100% investments in debt securities subject to specific approval from SEBI as a separate category of Foreign Institutional Investor or sub-account. Foreign Institutional Investors investment in debt through the 100% debt route is subject to an overall cap under the category of external commercial borrowings. SEBI allocates individual ceilings to Foreign Institutional Investors or sub-accounts within this overall limit on the basis of their track record or experience in debt markets. Foreign Institutional Investors investing through the 100% debt route may either invest proprietary funds or on behalf of broad based funds. Foreign corporate and foreign individuals shall not be eligible to invest through the 100% debt route. Foreign Institutional Investors may invest in the following securities through the 100% debt route:

  • Debentures of companies which are listed or to be listed
  • Dated government securities
  • Treasury bills

Government Initiatives

  • As mentioned earlier also, FIIs are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India
  • The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India
  • The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect
  • To further increase FII participation in the Indian market, the Government and Sebi have agreed to allow foreign individuals, corporates and other investors such as hedge funds to register directly as foreign institutional investors - a move designed to increase transparency and reduce transaction costs for these investors
  • Sebi has also hiked the total permissible investment limit in government and corporate debt to US$ 4.1 billion from US$ 3.5 billion. While the limit in corporate debt remains unchanged, FII investment limit in government securities has been increased to US$ 2.6 billion from US$ 2 billion
  • Also, institutional investors--including FIIs and their sub-accounts--have been allowed to undertake short-selling, lending and borrowing of Indian securities from February 1, 2008

Some investment highlights:

The Indian growth story has attracted global majors like CLSA, HSBC, Citigroup, Merrill Lynch, Crown Capital, Fidelity, Goldman Sachs, Morgan Stanley, UBS, T Rowe Price International, Capital International and ABN Amro among others to enter the Indian financial market.

  • Goldman Sachs and Macquarie have acquired a 20 per cent stake each in PTC India Financial services Ltd
  • Temasek Holdings, Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup and India Equity Partners (IEP) have picked a combined stake of 10 per cent in Bharti Infratel
  • An entity of Merrill Lynch has picked up 49 per cent stake in seven residential projects of real estate major, DLF

  • Blackstone has taken up a 26 per cent stake in MTAR Technologies

  • Citigroup, Morgan Stanley, Goldman Sachs and BSMA have picked up a combined stake of over seven per cent in Gitanjali Gems

  • Fidelity Investments International has picked up close to seven per cent equity in Transport Corporation of India (TCI)

FIIs as Dominant Players

  • The FII investments have been the corner stone in the phenomenal rise of the Indian stock markets. According to a study by Citigroup Research, the holding of FIIs in Indian companies exceeds that of domestic financial institutions, including mutual funds and insurance companies, retail and high net worth investors (HNIs) all put together

  • According to the study, while the value of FII equity holdings was US$ 193 billion by June 2007, equity assets held by domestic mutual funds are worth less than a fifth that amount at US$ 38.17 billion

  • Similarly, while FIIs held about 22 per cent of BSE 500 companies--up substantially from 12 per cent in March 2001-- the other groups of investors cumulatively have a 19.8 per cent holding in these companies. FIIs also held 26.9 per cent of the companies comprising the Sensex

  • This scenario continued for the rest of the year. The total investment of FIIs in Indian stocks was almost ten times that of the net investment of the domestic mutual funds. Total net investments of FIIs amounted to about US$ 17.2 billion at the end of 26 December, 2007 as against about US$ 1.7 billion by the domestic mutual funds

Pros & Cons of FII Investments

Pros of FII Investment

The advantages of having FII investments can be broadly classified under the following categories.

A. Enhanced flows of equity capital

FIIs are well known for a greater appetite for equity than debt in their asset structure. For example, pension funds in the United Kingdom and United States had 68 per cent and 64 per cent, respectively, of their portfolios in equity in 1998. Thus, opening up the economy to FIIs is in line with the accepted preference for non-debt creating foreign inflows over foreign debt. Furthermore, because of this preference for equities over bonds, FIIs can help in compressing the yield-differential between equity and bonds and improve corporate capital structures. Further, given the existing savings-investment gap of around 1.6 per cent, FII inflows can also contribute in bridging the investment gap so that sustained high GDP growth rate of around 8 per cent targeted under the 10th Five Year Plan can materialize.

B. Managing uncertainty and controlling risks

Institutional investors promote financial innovation and development of hedging instruments. Institutions, for example, because of their interest in hedging risks, are known to have contributed to the development of zero-coupon bonds and index futures.

FIIs, as professional bodies of asset managers and financial analysts, not only enhance competition in financial markets, but also improve the alignment of asset prices to fundamentals.

Institutions in general and FIIs in particular are known to have good information and low transaction costs. By aligning asset prices closer to fundamentals, they stabilize markets. Fundamentals are known to be sluggish in their movements. Thus, if prices are aligned to fundamentals, they should be as stable as the fundamentals themselves.

Furthermore, a variety of FIIs with a variety of risk-return preferences also help in dampening volatility.

C. Improving capital markets

FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. Equity market development aids economic development.3 By increasing the availability of riskier long term capital for projects, and increasing firms' incentives to supply more information about themselves, the FIIs can help in the process of economic development.

D. Improved corporate governance

Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs.

Dividend payment, for example, is discretionary. Bad corporate governance makes equity finance a costly option. With boards often captured by managers or passive, ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any economy. Incentives for shareholders to monitor firms and enforce their legal rights are limited and individuals with small share-holdings often do not address the issue since others can free-ride on their endeavour.

What is needed is large shareholders with leverage to complement their legal rights and overcome the free-rider problem, but shareholding beyond say 5 per cent can also lead to exploitation of minority shareholders.

FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms' operations, improve corporate governance. Among the four models of corporate control - takeover or market control via equity, leveraged control or market control via debt, direct control via equity, and direct control via debt or relationship banking - the third model, which is known as corporate governance movement, has institutional investors at its core. In this third model, board representation is supplemented by direct contacts by institutional investors.

Institutions are known for challenging excessive executive compensation, and remove underperforming managers. There is some evidence that institutionalization increases dividend payouts, and enhances productivity growth.

Cons: Management Control and Risk of Hot Money Flows

The two common apprehensions about FII inflows are the fear of management takeovers and potential capital outflows.

A. Management control

FIIs act as agents on behalf of their principals - as financial investors maximizing returns. There are domestic laws that effectively prohibit institutional investors from taking management control. For example, US law prevents mutual funds from owning more than 5 per cent of a company's stock.

According to the International Monetary Fund's Balance of Payments Manual 5, FDI is that category of international investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor in the management of the enterprise. According to EU law, foreign investment is labeled direct investment when the investor buys more than 10 per cent of the investment target, and portfolio investment when the acquired stake is less than 10 per cent.

Institutional investors on the other hand are specialized financial intermediaries managing savings collectively on behalf of investors, especially small investors, towards specific objectives in terms of risk, returns, and maturity of claims.

All takeovers are governed by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, and sub-accounts of FIIs are deemed to be "persons acting in concert" with other persons in the same category unless the contrary is established. In addition, reporting requirement have been imposed on FIIs and currently Participatory
Notes cannot be issued to un-regulated entities abroad.

B. Potential capital outflows

FII inflows are popularly described as "hot money", because of the herding behavior and potential for large capital outflows. Herding behavior, with all the FIIs trying to either only buy or only sell at the same time, particularly at times of market stress, can be rational.4 With performance-related fees for fund managers, and performance judged on the basis of how other funds are doing, there is great incentive to suffer the consequences of being wrong when everyone is wrong, rather than taking the risk of being wrong when some others are right. The incentive structure highlights the danger of a contrarian bet going wrong and makes it much more severe than performing badly along with most others in the market. It not only leads to reliance on the same information as others but also reduces the planning horizon to a relatively short one.

Value at Risk models followed by FIIs may destabilize markets by leading to Management 1998 (LTCM) crisis. Extrapolative expectations or trend chasing rather than focusing on fundamentals can lead to destabilization. Movements in the weightage attached to a country by indices such as Morgan Stanley Country Index (MSCI) or
International Finance Corporation (W) ( IFC) also leads to en masse shift in FII portfolios.

Another source of concern are hedge funds, who, unlike pension funds, life insurance companies and mutual funds, engage in short-term trading, take short positions and borrow more aggressively, and numbered about 6,000 with $500 billion of assets under control in 1998.

Some of these issues have been relevant right from 1992, when FII investments were allowed in. The issues, which continue to be relevant even today, are: (i) benchmarking with the best practices in other developing countries that compete with India for similar investments; (ii) if management control is what is to be protected, is there a reason to put a restriction on the maximum amount of shares that can be held by a foreign investor rather than the maximum that can be held by all foreigners put together; and (iii) whether the limit of 24 per cent on FII investment will be over and above the 51 per cent limit on FDI. There are some other issues such as whether the existing ceiling on the ratio between equities and debentures in an FII portfolio of 70:30 should continue or not, but this is beyond the terms of reference of the Committee.

It may be noted that all emerging peer markets have some restrictions either in terms of quantitative limits across the board or in specified sectors, such as, telecom, media, banks, finance companies, retail trading medicine, and exploration of natural resources. Against this background, further across the board relaxation by India in all sectors except a few very specific sectors to be excluded, may considerably enhance the attractiveness of India as a destination for foreign portfolio flows. It is felt that with adequate institutional safeguards now in place the special procedure mechanism for raising FII investments beyond 24 per cent may be dispensed with.


      FIIs' net investment in equity
Year Sensex Values

Returns (%)


1992-93 2280.52 N.A. N.R.
1993-94 3778.99 65.71% 5126.2
1994-95 3260.96 -13.71% 4796.3
1995-96 3366.61 3.24% 6942
1996-97 3360.89 -0.17% 8574.5
1997-98 3892.75 15.82% 5957.5
1998-99 3739.96 -3.92% -1584.4
1999-00 5001.28 33.73% 10121.9
2000-01 3604.38 -27.93% 9934
2001-02 3469.35 -3.75% 8755.2
2002-03 3048.72 -12.12% 2688.9
2003-04 5590.6 83.38% 43432.6
2004-05 6492.82 16.14% 40990.4
2005-06 11279.96 73.73% 48486.3
2006-07 13,072.10 15.89% 26669.1
2007-08 15,644.44 19.68% 54166.5

N.A. = Not Applicable, N.R. = Not Required

The analysis of the above data is as follows-

Xbar= 18337.13333 Ybar= 17.71%
Xbar2 = 336250458.9 Ybar2 = 0.03137681
ΣX = 275057 ΣY = 265.70%
ΣX2 = 10056794429.5200 ΣY2 = 2.014791637
ΣXY = 97383.18528 n = 15

ΣX2 - nXbar2

b= 9.70688E-06    
a= -0.08614%    
Regression Equation= Y= 1.01022E-05X - 0.44143%    
SST Σ(Y-Ybar)2= 154.413955%    
SSR Σ(Ŷ -Ybar)2= 47.234627%    
SSE Σ(Y -Ŷ)2 = 107.179329%    

Std Error (SQRT(SSE/n-2)=

Coeffefficeint of Det. (r2) 30.5896%    
Correlation Coeffecient(r) 0.55308    

The SLR Chart can be drawn as follows-

As can be seen from above, FII has a heavy influence on the annual returns of the Stock Market. Out of 15 years above 10 times, the returns have a positive correlation with that of the FII investment movement with an overall correlation of 0.57 which is considered to be significantly high. 33.0310% (CoD) of market variability in terms of returns annually is due to the FIIs net investments every year.

It can be inferred that market are moving at the beat of FIIs Investment over the years

The words Indian Stock markets & Indian Equity Markets & Sensex are used interchangeably in the whole document.

But are they the real movers & shakers of Indian equity markets???

To prove this I have taken the daily returns of Sensex and daily FIIs net investment figures from 1st April, 2007 - 20th March, 2008.There are total 242 observations which I thought are enough for correlation & regression analysis.

The values of FIIs net investments are available at SEBI's website and the daily sensex values are available on

Before establishing a linear relationship between the two variables[ daily sensex returns, FII net investment] it is very important to first prove that Markets are efficient enough in the weak form of EMH.

To prove this I have ran Auto Correlation Test to find that the values of sensex for the period 2007-08 are independent of the values of sensex to the corresponding figures of 2006-07.

It is even important that to prove that does today's value of sensex depend on yesterday's value? Because if it does depend than FIIs in no case influence the market because markets are not efficient enough and weak for of Market Hypothesis does not hold good.

Thus I have used Run Tests to find that, Are values independent of each other by testing them at 5% significance level.

After proving that Markets are Efficient, I went on to calculate the actual relationship between the two the variables and the ability of FII's Investments to fluctuate the stock market returns.

Auto Correlation Test

Let X variable be the values of sensex for the period 2006-07

Let Y variable be the values of sensex for the period 2007-08

The test is to prove whether the Y values have a correlation with the X values. This can be found out by using the measure Coefficient of Determination (r2).

The measure COD (r2) measures the variability in Y variable due to the variability in X variable.

The summary of Auto Correlation test is as follows-

Xbar= 5.25 Ybar = 9.60 ΣXY = 408879.325
Xbar2 = 27.5696 Ybar2 = 92.1963 N = 238
ΣX = 1249.66 ΣY = 2,285.25    
ΣX2 = 24,003,983.420 ΣY2 = 9,585,459.89    

ΣX2 - nXbar2      

b= 0.016538453        
a= 9.515052761        
r2= aΣY + bΣXY- n*Ybar2          

 ΣY2 - n*Ybar2

r2 = 0.068634%        
r = 0.026198013        

Since the value of r2 is 0.068634%which is not significant enough, thus we prove that markets are efficient enough in Weak Form of Market Hypothesis. Thus the change that has taken place in the values of sensex is not due to the past movements of Sensex.

Run Tests

This test finds out that the two consecutive values of Sensex are Independent of each other and Yesterday's price has no influence on today's price. I have used 5% level of significance to find out that the daily values are random and preceding value has no role to play to influence following value.

The Summary of the findings is as follows-

Total no. of runs(r)= 112 Total Count= 242
No. of positive price changes (n1)= 128    
No. of negative price changes(n2)= 114    
The mean for the data (µr)= 2*n1*n2 + 1    
  n1 + n2    
µr =


Standard Error (σr) =

Sqroot (2*n1*n2(2*n1*n2-n1-n2))


(n1+n2)2 *(n1+n2-1)

σr = 7.73593462    
Tests @ 5% level Significance      
At α= 0.05    
Z= 1.96    
The Lower Limit = 106.4326095    
The Upper Limit = 136.7574732    

Since the value runs-112, falls within the accepted region of 106.4326 & 136.7574 we conclude that the values of Sensex are Independent to each other.

Regression Analysis of two variables for the data of 2007-08

After that I have proved that market movements are independent to each other, there are other factors that makes the market move and shakes. One of the factors can be Foreign Institutional Investors net investments or net withdrawal daily. To find as till what extent the FIIs help the market to move and shakes I have made an attempt to run Correlation and simple regression analysis and with the help of various measures like Regression Sum of Squares, Coefficient of Determination, Error Sum of Squares, etc I was able to prove that market movements are not really correlated with the FIIs actions for the period of 2007-08.

Xbar= 207.9471074 Ybar= 0.07%
Xbar2 = 43241.99949 Ybar2 = 5.52218E-07
ΣX = 50323.2 ΣY = 17.98%
ΣX2 = 328890157.4000 ΣY2 = 0.084793774
ΣXY = 374.3103238 n = 242



ΣX2 - nXbar2

b= 1.05806E-06    
a= 0.05231%    
Regression Equation= Y=0.0523% + 1.0580E-06 X    

SST Σ(Y-Ybar)2=

SSR Σ(Ŷ -Ybar)2= 0.035648%    
SSE Σ(Y -Ŷ)2 = 8.430366%    
Std Error (SQRT(SSE/n-2)= 0.018742    
Coeffefficeint of Det. (r2) 0.4211%    
Correlation Coefficient(r) 0.06489    

Regression line Interpretation

From the table above the regression line formed is
Y=0.0523% + 1.0580E-06 X

Where Y is the sensex daily returns (Dependent Variable) and X is the FIIs net investment or withdrawal (Y variable).

If the value of X is zero which means if on any particular today FII do not invest or withdraw a single money than sensex will give a return of atleast .05% which is nothing but the Y intercept and Slope of line 1.0580E-06 indicates that returns will keep on increasing 1.0580E-06times of FII investment and vice versa.

This line can be plotted on the graph shown below-

Y axis represents the returns on sensex and X axis represents the FIIs investments and withdrawal. Since the correlation is very low the line passes through zero.

Other Interpretations

CoD (r2) = 0.4211%

It represents that only 0.4% of sensex movements is due to the movements of the FIIs Investments. The rest of the other movements can be attributable to other factors like mutual fund investments, Financial Institutional Investments, retail investments, HNIs & VHNIs Investments, etc.

Regression of Sum of Squares (SSR) = 0.035648%

It indicates that only 0.04% of the data points are on or very near to the regression line and the rest others are scattered everywhere.

Total of Sum of Squares (SST) = 8.466014%

It indicates the variance of the daily sensex returns from its mean return which can be attributable to all the factors including the variability of FIIs Investments.

Error of Sum Squares (SSE) = 8.430366%

It indicates the variance of the returns of sensex which is explained by the factors other than the variability due to FIIs Investments.

The other side of the coin......

It can be clearly seen from the above and concluded that FIIs are not the movers & shakers of the Indian Equity Markets.

But if we take a different point of view we know that Sensex is made up of only 30 companies by which we can infer is, that FIIs was not very keen in parking their funds in large capital funds. Because we know that FIIs have injected around 54182.6 crores as of 29th March, 2008.

If the investments is not in the 30 large companies than they have invested huge lump sum into small and mid capital companies. This can be one of the good reasons why small and mid cap companies like Walchandnagar Industries, Aban offshore ltd., Jai Corp Ltd., Balasore Alloys Ltd. and many more have their prices touching sky highs. May be FIIs are at the first place to find the hidden values in these companies or maybe it's another herding strategy that they have applied in investing in this small and mid cap companies.


FII inflows are even smaller when compared to the size of our economy. Over the last decade, the FII equity flows into our country have averaged around a meager ½ percent of GDP per annum. This figure is the lowest among the emerging markets. China, where most of the stock markets were closed to foreign investors till December2002, accounted for more than 40 per cent of all developing-country portfolio equity in 2002 and almost 75 per cent of the East Asia's region. Hence, the policymakers of our country have to craft appropriate strategies to attract more foreign portfolio flows, which can strengthen our domestic capital markets.

Looking Ahead

  • The Indian stock market will continue to be a safe haven for global investors in 2008 due to the economy's low exposure to slowing global growth, say the strategists of global investment banking firm, Merrill Lynch

  • According to its Investment Strategy report, portfolio investors will continue to pour money into the Indian economy, buoyed by the surging Indian economy which is growing at a much faster pace compared to most other countries of the world

  • As an endorsement of the attractiveness of Indian market, Standard and Poor, which compiles a list of stocks meeting the legendary investor's appetite twice a year, has named the three of the biggest names in Indian IT space alongside global giants Microsoft, Oracle, Ericsson, Cisco Systems, Diageo, China Mobile and SAP in its latest model portfolio


Before Generalizing that FIIs are not the movers and shakers of the market from the above analysis one should be very cautious. The proven fact above is for the period of 2007-08 and the analysis may be different for different periods.


Sensex Current & Past Year Values - Database Prowess

FII net Investment figures- From SEBI's official website

Few Websites:

- Foreign Institutional Investors - An Introduction

Edited by
- VijayChandra Kumar
ICFAI University Press