CHAPTER 5

OBSERVATION OF FIIs TRENDS IN INDIA

INTRODUCTION

SHARE OF FIIs IN INDIAN CAPITAL MARKET

SENSEX AND FIIs

NIFTY AND FIIs

VOLATILITY OF BSE SENSEX AND INDIAN

ECONOMY

VOLATILITY OF NSE CNX NIFTY AND INDIAN

ECONOMY
INTRODUCTION
Indian Markets have been one of the most attractive investment places for the FII's.
India being a developing nation attracts the foreign flows looking at the growth
potential in the Indian Economy. The FII's contribute a major chunk of volumes on
the Indian bourses and this in turn impacts the market moves. In case of recession
in the world economies, the foreign investors look for saver bets and India with a
rising GDP where other nations GDP / Growth is shrinking has always offered
greater investment avenues.

After a promising start to the decade in 2010-11 with achievement like GDP
growth of 8.4 per cent, bringing down fiscal deficit to 4.7 per cent from 6.4 of
GDP in 2009-10. GDP growth decelerated sharply to a nine year low of 6.5 per
cent during 2011-12.

The Indian capital markets boomed back in 2013-14 to not only surpass the
previous year benchmarks but also reach an all time high in terms of benchmark
indices and market capitalisation in secondary markets. A host of domestic and
global factors have facilitated this revival that includes various politico-economic
indicators as well. While lower trade deficit, lower CAD and lower inflation
fuelled the buoyancy outlining the investor optimism. Mixed cues from overseas
markets after US consumer confidence slumped in September to a four-month low,
further influenced the market sentiment. Expectations that the US government’s
partial shutdown and political impasse could lead to the US Federal Reserve
postponing tapering of monetary stimulus to the US economy also contributed to
the volatility.

A vibrant and efficient capital market is the most important parameter for
evaluating health of any economy.

The recent years witnessed significant reforms in the capital market. It is well
known that trading platform has become automatic, electronic, anonymous, order-
driven, nation-wide and screen-based. Shouting and gesticulations have yielded
place to punching and clicking. Speed and efficiency are the hallmark of the
current system. Across the system, multitude of market participants trade with one

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another anonymously and simultaneously. On any trading day, more than 10,000
terminals come alive, in 400 towns and cities; information is flashed on real time
basis. Equal opportunity is provided for all concerned to access the information.
Transparency is ensured in respect of dissemination of information, price and
quantum of the order; but, member’s identity is sought to be hidden to prevent any
bias in response. Today, a trading member need not wend his way to the
Jeejeebhoy Tower in Dalal Street, Mumbai or to any stock exchange building
elsewhere; he can comfortably sit at his computer terminal and execute the order.
Laptops, and hand mobiles, in fact, challenge the relevance of the brick and mortar.

An investor, today, need not wait, with his fingers crossed, for a fortnight or more,
for getting crossed cheques or crisp notes for the sale proceeds of his securities.
The trading cycle has been shortened to T+2. This shortening of the cycle has been
done in a phased manner but in a rapid succession – from T+5 to T+3 to T+2, all in
a matter of two years.

Another material development, which proved to be of immense relief to the

investors, was dematerialisation of the scrips. Now 99% of the scrips in the market
are dematerialised. Almost 100% of the trades are in D-mat form. Inconvenience
of physical custody and transfer, tedium of intimating change of address and
problems of bad delivery, late delivery, non delivery and the risks of forgery and
frauds have virtually disappeared – or shall I say - have been dematerialised! The
benefit is relished but not the cost. We should bear in mind the maxim – no cost,
no benefit. There is no free lunch in this world. Still, there is no denying the fact
that there could be a possibility for reduction in the cost; such possibilities are
explored.

At the stock exchanges, robust risk management system has been put in place,
Value-at-risk margining and exposure limits, on-line monitoring of margins and
positions, Clearing Corporation and Settlement Guarantee Fund mechanism for
trade settlement – all these have made Indian capital market now arguably world
class, in terms of transparency, efficiency and safety.

Indian securities market started the year 2012-13 on a low note following the
global economic signals of 2011-12. The reform measures undertaken by the

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government as well as slender improvements visible in the global economic
condition have however uplifted the mood in the domestic securities market. The
Sensex which closed at 17,404 on March 30, 2012 reached 18,836 as on March 28,
2013. It touched the 20,000 mark during the year, which was last seen in October
2010. Nifty, too, touched the 6,000 mark while closing at 5,683 on March 28, 2013
while the figure for March 30, 2012 was at 5296. While Sensex registered a growth
of 8.2 percent, Nifty recorded a growth of 7.3 percent.

Indian markets also witnessed the establishment of a third stock exchange in the
country with nationwide terminal with MCX-SX going live in equities and equities
derivatives segment on February 11, 2013. The benchmark index, SX40, is
however yet to be disseminated. The development is testimony to the expanding
Indian markets and their potential and would help in further strengthening the
participation of investors across the country. The number of demat accounts at the
two depositaries grew by over 5 percent during the fiscal policy. The number of
listed companies at NSE and BSE continued to rise.

The BSE SENSEX ended FY 2013-2014 at 22,386.27 as compared to 18,835.77 in

FY 2012-2013, an increase of 18.85% on a y-o-y (year-on-year) basis. In FY 2013-
14, FII’s invested ` 79,709 Crore, approximately USD 13,441.40 million in Indian
equities and negative investment of ` 28,060 Crore, approximately USD 4,565.90
million in the Indian Debt Market.

In FY 2012-13, despite difficult global conditions, FII’s invested a net of Rs.

1,40,033 Crore, approximately USD 25,832.60 million in the Indian equities
market and Rs. 28,334 Crore, approximately USD 5,214.40 million in Indian Debt
Market.

BSE is currently considered the 3rd largest Index Option exchange in the world,
4th largest Currency Futures exchange in the world, 5th largest Currency Options
exchange in the world, 8th largest exchange in the world by number of trades and
13th in the world by Market Capitalisation (Source: WFE).

Opening of the financial markets will result in competition and greater efficiency.
However, foreign participation will bring increased risk and exposure. Stability is

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thus need for financial markets for which safeguarding mechanism need to be
established.

The equity market in India is extremely vibrant but equity based funding solely,
cannot lead the economy to growth. The debt market remains underdeveloped with
a huge potential for increased activity. A strong hand is required to drive the long
term financing of infrastructure, housing and private sector development.

The road ahead for deepening the capital market need to be paved by the strong
linkage between development of economy and the financial system. A greater
measure of transparency is also required to build regulating procedures, to bring in
a new dimension to financial market and take it to the next level.

One of the challenges before the Indian capital market is expanding the investor
base and provide them access to high quality financial service .With a population
of more than a billion, a mere 1% of population participates in capital market and
of that only a fraction is active. Investor participation is very shallow considering
the size of Indian economy Trading volume in Indian capital market are lower as
compared to other markets such as US, China, UK, Germany etc. Another
Challenge faced by the investor is the cost involved in trading, which are
comparatively higher in India, than in developed markets Way Forward to Capital
Market.

Investor education and regulation of mutual fund distributors

Allowing AMCs to the flexibility to charge fees

Innovative products across different asset classes

Amending tax regime to encourage domestic AMCs to manage foreign

funds from India

Although higher investment by domestic institutional investors such as

insurance companies, pension funds to make investment in capital markets

Make implementation of proposal of SME stock exchange effective

Allowing institutional investors to participate in commodity markets

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Reduction in current withholding tax of 20% on income from debt
securities to encourage investment in debt market.

CAPITAL MARKET: THE CATALYST FOR ECONOMIC

GROWTH
Economic growth of any modern economy revolves around efficient financial
sector that pools domestic savings and mobilized foreign capital for productive
investments. Absence of effective financial institutions will result into under
exploitation or no exploitation of productive projects. In turn, the functioning of
financial institutions largely depends upon the existence of efficient capital market.
In case the capital market of an economy is underdeveloped or functions
abysmally, then it will create illiquidity and make it expensive to deal in such a
capital market. Illiquidity and high transaction costs also create bottlenecks in the
capital raising efforts of both domestic and international corporations. In view of
this, it becomes useful to study the linkage between two key variables, i.e.,
financial development and economic growth, as without an iota of doubt, it can be
said that the existence of a robust capital market ensures sound financial
development which in turn trigger economic growth. The following points show
the positive impact of financial development on three main elements, i.e. savings,
investments and capital allocation. a) Financial development enhances the
proportion of savings. b) Financial development may change the savings rate and
hence influence investments. c) Financial development enhances the efficiency of
capital allocation. Out of the three mentioned vital factors, capital allocation
bridges the gap between savings and investments, as it determines the allocation of
funds among various sectors. The importance of finance (facilitated by capital
market) is being manifested in its growing recognition over technological progress
as a key factor for economic progress. The new model of economic progress shows
that growth can be self-sustaining without technological progress (see Lucas 1988).
The important mechanisms of growth are the positive externalities related with
productive investments on the rest of the economy. An externality is an advantage
or a cost that individuals or firms do not receive or bear. Now, coming to the first
important factor of economic progress, i.e. savings and its channeling to firms or

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business organizations demands efficient financial intermediation by banks,
savings and loan institutions, investment banks, mutual funds, and insurance
companies. However, in absence of a formal financial system, informal markets
will do the tasks albeit less efficiently. Of course, while aggregating the household
savings and converting these into effective investments, financial intermediaries
absorb some resources themselves. These resources may take the shape of wages
for their human capital or of funds kept within the financial system (i.e. not
invested) to accommodate withdrawals from savers. Such un-invested funds are
called reserves. The lack of properly developed financial institutions is the mirror
image of underdeveloped capital market and this may prove very costly in terms of
economic progress, as savers may get motivated to divert their savings in
unproductive or passive financial assets like gold, instead of financial securities
that possess the potential of igniting economic growth. For example in presence of
a strong capital market, retail/corporate investors will prefer to invest in equity,
bonds, debentures etc. Apart from ensuring economic growth through active
interplay of savings, investments and capital allocation, capital markets plays a
crucial role in stabilizing the values of stocks and securities and reduce fluctuations
in the prices to the minimum. The process of stabilization is facilitated by offering
capital to the borrowers at a lower interest rate and reducing the speculative and
unproductive activities.

SHARE OF FIIs IN INDIAN CAPITAL MARKET

Reinvigorated FII inflows into the country during the year 2012 helped the Indian
markets become one of the best performing markets in the world in the year 2012,
recovering sharply from poor performance in the year 2011. The total net FII
flows to India in 2012 stood at US$ 31.01 billion. These flows were largely driven
by equity inflows (80 per cent of total flows) which remained buoyant indicating
confidence of such investors in the performance of the Indian economy in general
and Indian markets in particular. The economic and political developments in the
Euro-zone and United States had its impact in the markets around the world
including India. The temporary resolution of ‘fiscal cliff’ in US has had a positive

205
impact worldwide including India. Further, the reform measures initiated by the
Government recently have been received well by the markets.

Foreign institutional investors have gained a significant role in Indian capital

markets. Availability of foreign capital depends on many firm specific factors
other than economic development of the country.

Net investments by overseas investors into India reached the $30-billion level by
August end 2014, while their cumulative total inflows into the country crossed the
$200-billion mark.

During FY14, FIIs invested a net amount of nearly Rs 80,000 crore (US$ 13.07
billion) into India's equity market, as per data by Securities and Exchange Board of
India (SEBI).

FIIs have invested a cumulative Rs 7.08 trillion (US$ 115.71 billion) in shares
since 1992, the year they were allowed into the Indian market. During FY14, the
total number of FIIs registered in India was 1,710.

Foreign investment inflows are anticipated to grow more than double to US$ 60
billion in FY15, according to an industry study. Net foreign investment inflows,
driven by aggressive foreign institutional investment in the markets, are also
projected to go past the US$ 46.17 billion recorded during FY13, which is widely
regarded as one of the best years for foreign investments.

FACTORS CONTRIBUTED SIGNIFICANTLY TO THE FII

FLOWS TO INDIA:

1) Regulation and Trading Efficiencies: Indian stock markets have been

well regulated by the stock exchanges, SEBI and RBI leading to high levels
of efficiency in trading, settlements and transparent dealings enhancing the
confidence level of FIIs in increasing allocations to India.

2) New Issuance: We have witnessed extremely high quality issuance during

the year from companies such as NTPC, ONGC and TCS leading to strong
FII participation with successful new issuance of over $ nine billion, yet
another record for the year.

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3) Attractive Markets: Indian equity markets continue to be attractive to
foreign investors with expected earnings growth of over 13 per cent
compared with negative growth expected among competing countries in the
region such as Taiwan and Korea. Indian blue chips are seen to have high
quality of balance sheets with net debt to equity of the top 30 companies
being negative, with net cash on the balance sheets. However earnings
growth is expected to be lower than last year and upside in stock prices will
be subject to sentiments in the global markets and foreign flows to
emerging markets. However high quality new issuance from PSUs and
other large corporate will continue to see good demand from FIIs. However
domestic mutual funds have been net sellers of equities during 2004 with
risk aversion still prevalent among local investors after seeing several short
periods of high volatility. With the booming stock markets presently
catching the headlines in local press, this trend will hopefully reverse
during 2005.

4) Outsourcing: The rhetoric over outsourcing of jobs to India has died down
after the US elections and demand will soar for Indian BPO and software
services companies. However Indian software companies will need to
enhance margins by going up the value chain to high level consulting and
scaling up the project sizes. Significant outsourcing opportunities will also
open up in textiles and drugs with dismantling of quotas for textiles and
introduction of product patent regime for pharmaceuticals.

5) Infrastructure: Woefully inadequate infrastructure is the biggest

bottleneck for the growth and profitability of Indian corporations. The
administration needs to move much faster in privatisation of Projects in the
areas of power, transportation, ports, airports and other urban infrastructure
to enhance competitiveness. This is particularly relevant due to the fact that
competing countries in Asia Pacific and China have moved at a much faster
pace during the last five years and have in place a first world
infrastructure.

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 6) Capex Cycle: With strong balance sheets, high liquidity in the banking
system, supportive capital markets and growing demand for goods and
services we expect to see a strong wave of capital expenditure cycle
during the year leading to tremendous opportunities for Indian equities.

7) Dollar Weakness: Analysts continue to look for a weak US dollar with the
US twin deficits (budget and trade deficits) unlikely to be resolved anytime
soon. Studies have shown that flows into emerging markets rise
significantly during times of dollar weakness and India will continue to be
a beneficiary of this trend. Indian Rupee is expected to strengthen further
during 2005 which will be particularly favourable for domestic demand
oriented businesses such as banks and automobiles.

8) Rising Commodity Prices: Demand supply dynamics in both crude and

metals call for higher prices during 2005 with increasing Chinese demand
and economic recovery in Japan. This has inflationary implications for
India going forward, though it will be a boon for commodity counters.

9) Consolidation: FII activity has been focused on large cap companies due
to liquidity reasons, and hence several high quality mid cap companies
trade at a valuation discount due to lack of investor demand. We expect to
see significant merger activity among mid caps which will enable them to
gain better valuations under the institutional radar screen, in addition to
consolidation efficiencies. While China attracts significantly higher FDI,
India with its highly developed capital markets will be a beneficiary of FII
flows at increasing pace each year.

SENSEX AND FIIs

Foreign institutional investor (FII) is used to denote an investor-mostly of the form
of an institution or entity, which invests money in the financial markets of a
country different from the one where in the institution or entity was originally
incorporated. FII investment is frequently referred to as hot money for the reason
that it can leave the country at the same speed at which it comes in. In countries
like India, statutory agencies like SEBI have prescribed norms to register FIIs and

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also to regulate such investments flowing in through FIIs. FEMA norms include
maintenance of highly rated bonds (collateral) with security exchange.

Sensex: Index of top 30 highly liquid companies listed in BSE. All companies
selected in sensex depends on various technical factor like size, volume company`s
past performances and various other factors. But those 30 companies should
represent almost all sectors of India. Sensex (Index of BSE) is calculated using the
weighted average method using listed companies market capitalization. The
Sensex moves up and down based on movement of 30 companies share prices
listed in BSE sensitivity Index. The reasons of the rise and fall of the sensex may
be due to macro-level or micro-level factors such as Government policies, Inflation
rate, FDI & FII etc. In our research, we have only considered the FII Factor to find
out that is there any impact of FII on the movement of sensex.

Table 5.1 Net Investment by FIIs in Indian Capital Market (Rs in Crore
& percentage trends)

Year FIIs Investment Change in FIIs % Change

Investment
2005-06 41,467 -4413 -9.61857
2006-07 30,840 -10626 -25.6252
2007-08 66,179 35338 114.5812
2008-09 -45,811 -111990 -169.223
2009-10 1,42,658 188469 -411.406
2010-11 1,46,438 3780 2.649694
2011-12 93,725 -52713 -35.9968
2012-13 1,68,367 74642 79.6393
2013-14 51,649 -116718 -69.3236
Source: Various Issues of SEBI Handbook

Above table 5.1 shows the outflow and inflows of investment by FIIs and
percentage trends of FIIs investment. Change in FIIs investment is calculated basis
of subtracting current year investment value from previous year investment value.
And after then percentage change is calculated on percentage base current year
investment value –previous year investment value/previous year investment value
*100.

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 Figure 5.1 FIIs Investment

Now we analyze the net investment by FIIs Figure from 2005-06 to 2013-14.From
this, we can see that there is decrease in net investment 2006-07 compared to
previous year. And there was increase in investment in the year 2007-08 but again
decrease in 2008-09, but there was a steep increase in the year 2009-10, 2010-11,
but again decrease in 2011-12 after then FIIs investment again increase and
decrease in 2012-13, 2013-2014 respectively.

Table 5.2 Sensex performance over the year

Indices: Sensex
Period: year 2005-06 to 2013-14
Years BSE Sensex Percentage
variation
2005-06 11280 -
2006-07 13072 15.89
2007-08 15644 19.68
2008-09 9709 -37.9
2009-10 17528 80.5
2010-11 19445 10.9
2011-12 17404 -10.5
2012-13 18836 8.2
2013-14 22,386 18.8
Note: Indices relate to closing values as on the last trading day of the respective year.
The data presented above is compiled on the basis of reports submitted to SEBI by custodians.
Source: BSE.

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In above table the percentage variation is calculated on percentage base current
year investment value –previous year investment value/previous year investment
value *100.

Figure 5.2 Movement of Sensex

Above figure shows the percentage variation of Sensex indices. It is found that
during 2009-10, the highest rise (80.5%) and decline in 2012-13 (8.2%) followed
by 2005-06 to 2013-14.

INTERPRETATION

The Bombay stock exchange (BSE Sensex) which is one of the most important
secondary markets in India has seen many ups and downs from 2005-06 to 2013-
14. The market fluctuates continuously. Since then, the value in the Sensex has
increased and decreased.

The change in the Sensex value depends upon many factors, like

National and global issues

Legal and political issues

GDP growth rate of nation

Activities of the foreign investment etc……
From the table it is found that in the year 2008-09 the Sensex 9709 from the
previous year 15644. The reason for the huge fall in market was due to global

211
recession which not only caught Indian market but also the overall international
market too.

When the recession began to end in the world, the Sensex and other market could
see increase in value. And at end of 2010-11 the Sensex indices at 19445 after then
in 2013-2014 Sensex value at 22,386 the reason for good inflow of FIIs.

Table 5.3 Relationship between FIIs and BSE Sensex

Analysis is done for finding the correlation between FIIs investment and Sensex
value during the period from 2005-06 to 2013-14.

Deviation Standard
BSE Deviation of Standard FIIs
of FIIs Deviation of
Years Sensex BSE Sensex Deviation of Investment dxdy
Investment FIIs
(x) (dx) Sensex (y)
(dy) Investment
2005-06 11280 -4864.888889 23667143.9 41,467 -35,812 1282507302.23 174221941.4

2006-07 13072 -3072.888889 9442646.123 30,840 -46,439 2156591040.79 142702228.5

2007-08 15644 -500.8888889 250889.679 66,179 -11,100 123212466.68 5559922.321

2008-09 9709 -6,436 41420665.79 -45,811 -123,090 15151175453.35 792194278.4

2009-10 17528 1,383 1912996.346 1,42,658 65,379 4274399112.35 90426267.65

2010-11 19445 3,300 10890733.35 1,46,438 69,159 4782951912.35 228232017.7

2011-12 17404 1,259 1585360.79 93,725 16,446 270467261.35 20707201.43

2012-13 18836 2,691 7242079.012 1,68,367 91,088 8297003502.23 245127629.9

2013-14 22,386 6,241 38951467.9 51,649 -25,630 656902595.57 -159960371.2

Total 145304 0 135363982.89 695,512 0 36995210646.89 1539211116

Summary output

Mean Standard Deviation

BSE SENSEX 16144.89 15040442.54
FII 77279.11111 4110578960.77

r = 0.687818538 (Karl Pearson’ coefficient of Correlation)

It has been founded by the above table that BSE Sensex and foreign institutional
investment has followed a high degree relationship. It is clear that the FIIs are
influencing the Sensex movement to a greater extent. Further it is evident that the
Sensex has increased when there are positive inflows of FIIs and there were decrease
in Sensex when there were negative FII inflows. The Pearson correlation values
indicate positive correlation between the FIIs investment and the movement of Sensex
(Pearson’ correlation value is r=0.687818538).

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 Figure 5.3 Relationship between FIIs and BSE Sensex

From the above Figure, it is found that the correlation between net FIIs investment
and BSE Sensex is 0.687818538 which shows a high degree of relationship
between FIIs investment and BSE Sensex. The positive correlation between the
two reveals the fact that the FIIs investment is an important factor in enhancing the
BSE Sensex of Bombay stock exchange consequently have a positive impact on
Indian capital market.

NIFTY AND FIIs

The National Stock Exchange (NSE) is India's leading stock exchange covering
various cities and towns across the country. NSE was set up by leading institutions
to provide a modern, fully automated screen-based trading system with national
reach. The Exchange has brought about unparalleled transparency, speed &
efficiency, safety and market integrity. It has set up facilities that serve as a model
for the securities industry in terms of systems, practices and procedures.

NSE has played a catalytic role in reforming the Indian capital market in terms of
microstructure, market practices and trading volumes. The market today uses state-
of-art information technology to provide an efficient and transparent trading,
clearing and settlement mechanism, and has witnessed several innovations in
products & services viz. demutualisation of stock exchange governance, screen
based trading, compression of settlement cycles, dematerialisation and electronic

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transfer of securities, securities lending and borrowing, professionalization of
trading members, fine-tuned risk management systems, emergence of clearing
corporations to assume counterparty risks, market of debt and derivative
instruments and intensive use of information technology.

The CNX Nifty, also called the Nifty 50 or simply the Nifty, is National Stock
Exchange of India's benchmark stock market index for Indian equity market. Nifty
is owned and managed by India Index Services and Products (IISL), which is a
wholly owned subsidiary of the NSE Strategic Investment Corporation Limited.
IISL had marketing and licensing agreement with Standard & Poor's for co-
branding equity indices until 2013. The 'CNX' in the name stands for 'CRISIL NSE
Index'.

CNX Nifty has shaped up as a largest single financial product in India, with an
ecosystem comprising: exchange traded funds (onshore and offshore), exchange-
traded futures and options (at NSE in India and at SGX and CME abroad), other
index funds and OTC derivatives (mostly offshore).

The CNX Nifty covers 22 sectors of the Indian economy and offers investment
managers exposure to the Indian market in one portfolio. During 2008-12, CNX
Nifty 50 Index share of NSE market capitalisation fell from 65% to 29% due to the
rise of sectoral indices like CNX Bank, CNX IT, CNX Mid Cap, etc. The CNX
Nifty 50 Index gives 29.70% weightage to financial services, 0.73% weightage to
industrial manufacturing and nil weightage to agricultural sector.

The CNX Nifty index is a free float market capitalisation weighted index. The
index was initially calculated on full market capitalisation methodology. From
June 26, 2009, the computation was changed to free float methodology. The base
period for the CNX Nifty index is November 3, 1995, which marked the
completion of one year of operations of National Stock Exchange Equity Market
Segment. The base value of the index has been set at 1000, and a base capital of Rs
2.06 trillion. The CNX Nifty Index was developed by Ajay Shah and Susan
Thomas. The Nifty moves up and down based on movement of 50 companies share
prices listed in NSE index. The reasons of the rise and fall of the nifty may be due
to macro-level or micro-level factors such as Government policies, Inflation rate,

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FDI & FII etc. In our research, we have only considered the FIIs Factor to find out
that is there any impact of FII on the movement of Nifty.

Table 5.4 NSE S&P CNX Nifty Performance over the Year
Indices: S&P CNX Nifty
Period: year 2005-06 to 2013-14

Years S&P CNX Nifty Percentage

Variation

2005-06 3403

2006-07 3822 12.31

2007-08 4735 23.9

2008-09 3021 -36.2

2009-10 5249 73.8

2010-11 5834 11.1

2011-12 5296 -9.2

2012-13 5683 7.3

2013-14 6,704 18.0

Note: Indices relate to closing values as on the last trading day of the respective year.
The data presented above is compiled on the basis of reports submitted to SEBI by
custodians.
Source: NSE

In above table the percentage variation is calculated on percentage base current

year investment value–previous year investment value/previous year investment
value *100.

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 Figure 5.4 Movement of NSE S&P CNX Nifty

NSE has played a catalytic role in reforming the Indian capital market in terms of
microstructure, market practices and trading volumes. The CNX Nifty, also called
the Nifty 50 or simply the Nifty, is National Stock Exchange of India's benchmark
stock market index for Indian equity market.

The change in the NSE CNX Nifty depends upon many factors, like

National and global issues

Legal and political issues

GDP growth rate of nation

Activities of the foreign investment etc……

From above the it is clear that NSE CNX Nifty increase continuously except some
years such as 2008-09. The reason for the huge fall in market was due to global
recession which not only caught Indian market but also the overall international
market too. After then again decrease in 2011-12 from the previous year.

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Table 5.5 Relationship between FIIs and NSE S&P CNX Nifty

Analysis is done for finding the correlation between FIIs Investment and NSE S&P
CNX Nifty value during the period from 2005-06 to 2013-14 to understand the
correlation between the capital market changes in relation to the FIIs.
Standard FIIs Deviation of
S&P Deviation of Standard
Deviation of Invest- FIIs
Years CNX S&P CNX Deviation of FIIs dxdy
S&P CNX ment Investment
Nifty Nifty (dx) Investment
Nifty (y) (dy)
-1457.777778 2125116.049 -35,812 1282507302.23 52206099.75
2005-06 3403 41,467

-1038.777778 1079059.272 -46,439 2156591040.79 48239916.64

2006-07 3822 30,840

-125.7777778 15820.04938 -11,100 123212466.68 1396147.309

2007-08 4735 66,179

-1,840 3384782.272 -123,090 15151175453.35 226458451.1

2008-09 3021 -45,811

388 150716.4938 65,379 4274399112.35 25381537.53

2009-10 5249 1,42,658

973 947161.4938 69,159 4782951912.35 67306967.53

2010-11 5834 1,46,438

435 189418.3827 16,446 270467261.35 7157616.309

2011-12 5296 93,725

822 676049.3827 91,088 8297003502.23 74894486.42

2012-13 5683 1,68,367

1,843 3397468.16 -25,630 656902595.57 -47241990.4

2013-14 6,704 51,649

43747 0 695,512 0 36995210646.89 455799232.2

Total 11965591.56

Summary output

Mean Standard Deviation

S&P CNX Nifty 4860.778 1329510.173

FII 77279.11111 4110578960.77

r = 0.685068 (Karl Pearson’ coefficient of Correlation)

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 Figure 5.5 Relationship between FIIs and NSE S&P CNX Nifty

From the above table and figure, it is found that the correlation between FIIs
investment and CNX Nifty is 0.685068 which shows a very medium degree of
relationship between FIIs investment and NSE S&P CNX Nifty. The positive
correlation between the two reveals the fact that the FIIs investment is an important
factor in enhancing the NSE S&P CNX Nifty of National stock exchange
consequently have a positive impact on Indian capital market.

VOLATILITY AND INDIAN ECONOMY

India is the seventh largest and the second most populous country in the world with
a history that spans thousands of years. The economic landscape of India
underwent a paradigm change when the economy was liberalized in 1991. It also
laid the foundation for a strong regulatory network. Indian economy has been one
of the stars of global economy in recent years. India, today, has a vibrant economy
and is recognized as a leader among the emergent countries with a huge potential
for growth. India is now initiating the second generation reforms intended for a
faster integration of the Indian economy with the world economy. In the present
decade India has witnessed unprecedented levels of economic expansion and also
seen healthy growth of trade. GDP reflects the potential market size of Indian
economy.

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The performance of India’s economy over the last decade has been
quite impressive. After a major economic crisis in 1991, the
Government of India initiated bold reform measures and
consequently the economy started experiencing a rapid economic
growth rate and inflow of increasing foreign investment. Added to
these has been the boom in the information technology sector where
India is now rated to be virtually the leader.

Stock markets are said to reflect the health of the economy of country. On the other
hand, major economic indicators determine stock market movements to a large
extent. Stock markets play a pivotal role in growing industries and commerce of a
country that eventually affect the economy. Its importance has been well
acknowledged in industries and investors perspectives. The stock market avail
long-term capital to the listed firms by pooling funds from different investors and
allow them to expand in business and also offers investors alternative investment
avenues to put their surplus funds in. The investors carefully watch the
performance of stock markets by observing the composite market index, before
investing funds. The market index provides a historical stock market performance,
the yardstick to compare the performance of individual portfolios and also provides
investors for forecasting future trends in the market.

Table 5.6 Volatility of BSE Sensex, NSE S&P CNX Nifty and Indian Economy

Years Annualised Annualised India's Growth Rates in

Volatility of Volatility of NSE GDP (2004-2005 Prices)
BSE Sensex S&P CNX Nifty (Factor Cost)
2005-06 16.3 16.4 9.48
2006-07 27.6 28.0 9.57
2007-08 30.6 32.1 9.32
2008-09 43.58 41.5 6.72
2009-10 29.2 29.4 8.59
2010-11 21.1 21.4 8.91
2011-12 20.2 20.4 6.69
2012-13 12.5 12.9 4.47
2013-14 17.5 18.1 4.74
*Annualized volatility is calculated by multiplying the standard deviation of the logarithmic returns
with the Square root of the number of trading days for the period.

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Source: Bloomberg Financial Services. (Annual report of SEBI)

Table 5.7 Relationship between Volatility of BSE and Indian Economy

This table shows the relationship between Volatility of BSE Sensex and the real
economic growth in India over a period 2005-06 to 2013-14.

Years Volatility Deviation of Standard India’s Deviation Standard dxdy

BSE BSE Sensex Deviation of Growth Of GDP Deviation
Sensex BSE Sensex Rates In (dy) of GDP
(dx)
GDP
(Factor
Cost)

2005-06 16.3 -7.986666667 63.78684444 9.48 1.87 3.4969 -14.93506667

2006-07 27.6 3.313333333 10.97817778 9.57 1.96 3.8416 6.494133333

2007-08 30.6 6.313333333 39.85817778 9.32 1.71 2.9241 10.7958

2008-09 43.58 19.29333333 372.2327111 6.72 -0.89 0.7921 -17.17106667

2009-10 29.2 4.913333333 24.14084444 8.59 0.98 0.9604 4.815066667

2010-11 21.1 -3.186666667 10.15484444 8.91 1.3 1.69 -4.142666667

2011-12 20.2 -4.086666667 16.70084444 6.69 -0.92 0.8464 3.759733333

2012-13 12.5 -11.78666667 138.9255111 4.47 -3.14 9.8596 37.01013333

2013-14 17.5 -6.786666667 46.05884444 4.74 -2.87 8.2369 19.47773333

Total 218.58 0.00 722.84 68.49 0.00 32.65 46.10

Summary output

Mean Standard Deviation

BSE Sensex 24.28666667 80.3152

GDP 7.61 3.627555556

r = 0.300115416 (Karl Pearson’ coefficient of Correlation)

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 Figure 5.6 Relationship between volatility of BSE and Indian economy

From the above figure, it is found that the correlation between Volatility of BSE
Sensex and GDP growth rate is 0.300115416 which shows a low degree of
correlation between Volatility of BSE Sensex and GDP growth rate. The positive
correlation between the two reveals the fact that the Volatility of BSE Sensex is an
important factor in enhancing the GDP growth rate consequently have a positive
impact on Indian economy.

Table 5.8 Relationship between Volatility of NSE and Indian Economy

This table shows the relationship between Volatility of NSE CNX Nifty and the
real economic growth in India over a period 2005-06 to 2013-14.
Years Volatility Deviation of Standard India’s Deviati Standard dxdy
NSE S&P NSE S&P CNX Deviation of Growth on of Deviation
CNX Nifty NSE S&P CNX Rates in GDP of GDP
Nifty (dx) Nifty GDP (dy)
(Factor Cost)
2005-06 16.4 -8.066666667 65.07111111 9.48 1.87 3.4969 -15.0846667
2006-07 28.0 3.533333333 12.48444444 9.57 1.96 3.8416 6.925333333
2007-08 32.1 7.633333333 58.26777778 9.32 1.71 2.9241 13.053
2008-09 41.5 17.03333333 290.1344444 6.72 -0.89 0.7921 -15.1596667
2009-10 29.4 4.933333333 24.33777778 8.59 0.98 0.9604 4.834666667
2010-11 21.4 -3.066666667 9.404444444 8.91 1.3 1.69 -3.98666667
2011-12 20.4 -4.066666667 16.53777778 6.69 -0.92 0.8464 3.741333333
2012-13 12.9 -11.56666667 133.7877778 4.47 -3.14 9.8596 36.31933333
2013-14 18.1 -6.366666667 40.53444444 4.74 -2.87 8.2369 18.27233333
Total 220.2 0.00 650.56 68.49 0.00 32.65 48.915

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Summary output

Mean Standard Deviation

24.46666667 72.28444444
NSE S&P CNX Nifty
7.61 3.627555556
GDP
r = 0.335637199 (Karl Pearson’ coefficient of Correlation)

Figure 5.7 Relationship between volatility of NSE and Indian Economy

From the above table and figure, it is found that the correlation between Volatility
of NSE CNX Nifty and GDP growth rate is 0.335637199 which shows a low
degree of relationship between Volatility of NSE CNX Nifty and GDP growth
rate. The positive correlation between the two reveals the fact that the Volatility of
NSE CNX Nifty is an important factor in enhancing the GDP growth rate
consequently have a positive impact on Indian economy. It is also clear that a
higher volatility has a positive impact on Indian economy.

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CONCLUSIONS

The study conducted observed that investments by FIIs and the movements of BSE
Sensex and NSE S&P CNX nifty are quite closely correlated. According to above
analysis, FIIs investment have significant impact on the movement of Indian
capital market. FIIs have positive impact on BSE Sensex and Nifty. However
there are other macroeconomic factors also influence the bourses in the stock
market, but FII is definitely one of the factors. This signifies that market rise with
increase in FIIs and collapse when FIIs are withdrawn from the market. In the
absence of any other substantial form of capital inflows, the potential ill effects of
decrease in the FIIs flows into the Indian economy can be severe which was
evident at the time of U.S subprime lending crisis. The findings of this study also
indicate that Foreign Institutional Investors have emerged as the most dominant
investor group in the domestic capital market particularly, in the companies that
constitute in BSE Sensex and NSE S&P CNX Nifty. According to above analysis
it is also clear that a higher volatility has a positive impact on Indian economy.

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