An Empirical Analysis of Foreign Institutional Investment and Stock Market Returns in India

Augmented Dickey Fuller and Phillips-Perron tests were employed to examine the stationarity of both net foreign institutional investment and NSE market return series. Besides, Instantaneous Granger Causality test was employed to examine the contemporaneous relationship between net foreign institutional investment flows and equity market returns in India for the pre-global financial crisis and during a crisis period. By and large, our analysis reveals that there is an evidence of negative feedback trading hypothesis and positive feedback trading hypothesis by foreign investors before the global financial crisis period and during a crisis period respectively. This implies that foreign institutional investment acts as smoothening effect and destabilizing forces before and during the crisis period respectively. However, such positive feedback trading strategies from foreign institutional investors seem to be rational during the period of global financial crisis.