CRESCENT BUSINESS

SCHOOL

SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT

REPORT SUBMITTED ON

EMPIRICAL RELATIONSHIP BETWEEN FII AND IIP

BY

HARISH.V
 0929047

INTRODUCTION:

The economies like India, which are growing very rapidly, are becoming hot favorite
investment destinations for the foreign institutional investors. These markets have the
potential to grow in the near future . This is the prime reason behind the growing interests of
the foreign investors. The promise of rapid growth of the investable fund is tempting the
investors and so they are coming in huge numbers to these countries. The money, which is
coming through the foreign institutional investment is referred as 'hot money' because the
money can be taken out from the market at anytime by these investors. The foreign
investment market was not so developed in the past. But once the globalization took the
whole world in its grip, the diversified global market became united. Because of this the
investment sector became very strong and at the same time allowed the foreigners to enter the
national financial market.

At the same time the developing countries understood the value of foreign investment and
allowed the foreign direct investment and foreign institutional investment in their financial
markets. Although the foreign direct investments are long term investments but the foreign
institutional investments are unpredictable. The Securities and Exchange Board of India looks
after the foriegn institutional investments in India.

The report shows the empirical analysis between FII and IIP (The index of industrial
production is the number denoting the condition of industrial production during a certain
period) and tests their impact on economic growth (positive or negative).

DATA AND PERIOD OF STUDY:

The data for the study have been collected from the handbook of statistics on Indian economy
(RBI). The yearly data have been taken for the period April 2000 to March 2010. The tool
used to test the data is Simple Regression where X being the independent variable - FII and Y
being the dependent variable - IIP. The data are analyzed
 i) For the period of April 2000 – March 2010 and also

ii) For the year 2008 and 2009 (Recession Period)

CONCLUSION:

The empirical results reveal that FII has negative impact on economic growth, but it is very
negligible. But while analyzing the data for the recession period (2008 and 2009), FIIs impact
on economic growth is medium.
Economic growth in India is financed either by its domestic savings or foreign savings that
flow into the country. We had to largely depend on domestic savings to give impetus to our
growth, prior to financial sector reform in the country. Though, the foreign capital flows into
the country in the form of aid, External Commercial Borrowing (ECB) and NRI deposits, it
did not and was not expected to contribute much towards are capital formation or economic
growth. After 1993, when capital account was partially liberalized, it was hoped that capital
inflows would contribute towards our economic growth. It concludes that capital inflows
have not contributed towards industrial production or economic growth. There are two
reasons for this, one the amount of capital inflows to the country has not been enough. Two,
the amount of capital that does flow in, is not utilized to its full potential.