Authors: Dr. Chanchal Chopra
The sudden outflow by foreign institutional investors (FIIs) during the global financial crisis of 2008 and its surges in the period subsequent to that have created considerable disturbance in emerging market economies (EMEs) with regard to the stability of such flows. Although FIIs provide a welcome source of external finance for domestic companies, their short-term investment horizon raises concerns over their stability and their negative impact on the country, especially on the stock prices, the exchange rate, the export competitiveness of companies, and the sudden outflow by the FIIs. Thus, it becomes important to implement such policies or mechanisms which can withstand the potential volatility of foreign institutional investment. The central banks of EMEs have to meet the challenge with regard to the formulation of monitory policy and exchange rate management by taking into account the current account deficit and the growth potential of the country. This paper seeks to find out various options available to an emerging economy to deal with fickle foreign institutional investors. Multiple Regression has been used to see the determinants of FIIs in India during 1993-94 to 2009-10 and ratio analysis has been used to see the impact of FIIs on Stock prices and Stock Market Development. The results show that the maturity of the stock market of India and the wider interest differential between India and USA have influenced the inflow of FII in India most during the period under study. FIIs have created volatility in the stock market, though not impacting the development of stock market adversely.
Keywords: Foreign, Volatility, Market, Investor