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TITLE
A

Project Report

“A STUDY ON DETERMINANTS OF FOREIGN

INVESTMENT AND ITS IMPACT ON INDIAN STOCK
MARKET”

For the partial fulfillment of the award of degree of Bachelor of Commerce (B.
Com Vocational) III Insurance Principles and Practices course from Dr.
Bhimrao Ambedkar University, Agra.

2023-24

SUBMITTED BY: SUPERVISOR:

Name: Smrati Shrivastava Dr. Meenakshi Chawla

Class: B.com (VOC) Ins.III Year (Assistant Professor)

Roll No.-2200030911296 B. Com Voc. Insurance

Enroll. No: A-21109698 Faculty of Commerce

St. John’s College, Agra

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 CERTIFICATE

This is to certify that Smrati Shrivastava has

completed the project titled “Determinants of
foreign investment and its impact on Indian
Stock Market” in the partial fulfillment of the
requirement of the degree of B.com III{VOC}
insurance under my supervision.

To the best of my knowledge and belief, this

is the original work of the candidate and same
has not been submitted anywhere else for the
award of the degree of diploma.

SUPERVISOR
(Mr. Alex Paul)

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 DECLARATION

I, SMRATI SHRIVASTAVA student of B.COM

(Vocational) here by declare that the project report titled
“" Determinants of foreign investment and its impact on
Indian Stock Market” is my original project work and
has not been previously submitted for the award of my
degree, diploma, fellowship or other program in any
institution.

(signature of candidate)

SMRATI SHRIVASTAVA

ROLL NO.2200030911296

Enroll. No: A-21109698

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 ACKNOWLEDGEMENT

At the very beginning I am grateful to the Almighty for keeping me

blessed throughout my research journey. I would like to take an
opportunity to express my gratitude for all those who have encourage
me in taking and carry out this project work.

To start with, I express my sincere gratitude to my Course

Coordinator Dr. Sanjeev Sharma, Supervisor Mr. Alex Paul and
special thanks to our teachers Mrs. Kajol Agarwal, Dr. Meenakshi
Chawla and Rishika Agrawal for their constant support and guidance
for successfully completion of my project work

I shall remain thankful to Dr.S.P. Singh (Principal), St. John’s College

me to carry on research work and valuable support

SMRATI SHRIVASTAVA

ROLL NO. 2200030911296

Enroll. No: A-21109698

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 CONTENTS

CHAPTER PAGE
CHAPTER NAME
NO. NO.

1. INTRODUCTION AND OBJECTIVES OF STUDY

1.1 BACKGROUND OF THE STUDY

1.2 OBJECTIVES OF THE STUDY

1.3 FOREIGN INVESTMENT SCENARIO IN INDIA

1.4 RATIONALE OF FOREIGN INVESTMENT

1.5 BENEFITS OF FOREIGN INSTITUTIONAL INVESTMENT

1.6 SUMMARY

2. REVIEW OF LITERATURE
2.1 INTRODUCTION

2.2 LITERATURE EXPLORING DETERMINANTS OF FOREIGN

CAPITAL FLOWS IN INDIA
2.3 LITERATURE EXPLORING IMPACT OF FOREIGN CAPITAL
FLOW ON INDIAN STOCK MARKET
2.4 RESEARCH GAP

3. OBJECTIVE STUDY - I
3.1 PROBLEM STATEMENT

3.2 RESEARCH OBJECTIVES

3.3 RESEARCH METHADOLOGY

3.4 LIMITATIONS OF THE STUDY

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 CONTENTS

4. OBJECTIVE STUDY - II
4.1 TREND ANALYSIS OF FOREIGN INVESTMENT
4.2 FDI IN INDIA
4.3 COMBINATION OF FOREIGN CAPITAL INVESTMENT
4.4 INDIA’S TREND IN GLOBAL MARKET
4.5 CONCLUSION

5. CONCLUSION AND FINDINGS

5.1 CONCLUSION AND SUMMARY OF THE REPORT
5.2 FINDINGS AND IMPLEMENTATIONS OF THE STUDY
5.3 SCOPE OF FURTHER RESEARCH

6. REFRENCES AND BIBLIOGRAPHY

6.1 REFRENCES AND BIBLIOGRAPHY

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 CHAPTER -1

CONTENTS INCLUDED IN CHAPTER 1:

1.1 Background of the Study

1.2 Objective of the study

1.3 Foreign Investment Scenario in India

1.4 Rationale of Foreign Investment

1.5 Benefits of Foreign Institutional Investment

1.6 Summary

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 CHAPTER -1

1.1 BACKGROUND OF THE STUDY:

Most of the countries in the world have recognized the role and relevance of foreign capital to manage
the rapid changes in the economy but the India being a developing country has shortage of funds. No
doubt fund is the main necessity of any economy to increase the productivity as well as to maintain
the required level of foreign exchange reserves. In present globalized scenario, the foreign capital has
been emerged as a main tool to speed up the economic activity and to bring other scarce resources like
managerial expertise and technical knowhow which enhance the productivity. As we know, foreign
investment signifies the all funds raised by one country from another country to meet the financial or
production process requirements. In modern era of liberalization, trend of foreign investment is
increasing day by day but some of the countries discourage it on certain grounds. However,
acceptance or rejection of foreign capital inflows depends on country’s domestic conditions which
differ country to country. Mainly foreign investment can be categorized into two parts as: Foreign
Direct Investment (FDI) Foreign Portfolio Investment (FPI): FPI can be further divided as Foreign
Institutional Investments Others Foreign capital which is directly invested in production activities for
a long time period intending to have the controlling interest in the corporate is named as foreign direct
investment whereas FIIs are short term in nature and are not made directly in corporate but indirectly
via financial markets. FIIs have the chances of bidirectional causality with the yields of native finance
markets like securities markets, money markets and market of foreign exchange. Thus, it becomes
necessary to understand the factors affecting foreign investment, especially for developing countries
because it affects the domestic financial markets significantly in short run as well as in long run.

India has a huge market having the population more than 1 billion people with the second rank in
world (Bandyopadhyay, 2013). If we characterize the Indian economy on the basis of wage rate, we
find it very low in comparison to other countries. India is a developing nation which has been a very
narrow to opening up its boundaries for trading with other countries. Prior to nineties but being it a
poor country it has also been facing a fund deficit to achieve its growth targets. After independence, a
planning commission now which has been replaced with NITI Aayog, which was set up to make the
optimum utilization and allocation of resources in a systematized manner. A concept of five-year plan
was introduced as first plan was focused on agriculture and second was on major industries and later
on as per requirement of macro and micro variables of the economy. A proper path was designed to
achieve the balanced development. All efforts were made to make the nation developed. Different
Governments

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 CHAPTER -1

adopted different approaches of economic growth. India realized the importance of foreign capital as a
source of fund in 1980s but in real opened its own boundaries for capital inflow in 1990s. In 1991, it
made its new industrial policy in 1991 as per guidelines of International Monetary Fund which is also
known as major economic reforms of the country. These are the first major economic reforms adopted
by India at macro level by changing the entire road map of economic growth and development. At the
time Indian economy was crashed and only way to settle the foreign debts was to make the
devaluation of rupee but govt. of India got ready to adopt the IMF recommendations to handle such
economic crisis. A Narsimha committee was formed address this entire economic scenario and after
its report these economic reforms were applied. Foreign capital was taken as a source of funds to meet
the shortage of capital. Being the markets untapped foreign investors was also keen to grab this
opportunity. So, increase the pace of economic development doors for foreign capital inflows were
opened up which results as per expectations. Indian economy grew rapidly. Further for ease of foreign
trading FERA, 1973 was replaced with FEMA 1999 which also extended the foreign investments in
India. India has been acknowledged as profitable venue for investment for the foreign prospective
investors with wide variety of cultures, markets etc. Foreign capital represents foreign direct

investment and foreign portfolio investments. These two ways of investments have been permitted by
the Govt. of India for foreign capital inflows. Hence prior to 1991, Indian Government didn’t open its
boundaries for foreign investment but thereafter it adopted economic reforms of liberalization,
privatization and globalization recommended by IMF and became a good platform for making the
FDI and foreign capital inflow via FPI as well. In modern era, financial markets are growing very
rapidly in leap and bounds after these reforms. No doubt, huge amount of worldwide capital has
flowed in India after economic reforms of 1991. It is also true that such inflow may be advantageous
as well as dangerous to the health of the recipient country. Major positive influence of it on the nation
is that it enhances the level of economic activity by increasing the domestic investment and expanding
the scope of financial intermediation. But correspondingly foreign capital also carries various kinds of
threats to the financial and product markets of the host country in form of inflation, rise in foreign
exchange rate, feverishness and instability of the economy. Hence, the foreign capital has been a
debatable issue in field of finance and finds the attention to rethink upon particularly in developing
countries like India. These are multiple reasons which grasp the attention of various stakeholders on
this issue.

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 CHAPTER -1

1.2 Objective of the study

This objective is divided in to two portions; preliminary portion talks about determinants of FDI
inflow in India and later portion describes the determinants of FII inflow in India. ARDL Bound test
has been applied to both of the portion separately. Determinants of FDI inflow in India: Descriptive
analysis of the data, states that all the variables are negatively skewed except exchange rate, market
capitalization and inflation rate which are positively skewed. A Jarque Berra test statistic of normality
shows that probability value of all the variables is> 0.05 or insignificant means collected data passes
the normality test. F statistic (computed value) is over and above the given upper bound value, so
cointegration is present among the chosen variables. ADF Test of Unit Root indicates that at the level,
the probability values of variables like foreign direct investment and interest rate have < 0.05 percent
probability value which signifies that foreign direct investment and interest rate are stationary at zero
level and their order of integration is I (0). Beside this, variables like Exchange Rate, GDP, Foreign
exchange reserves, GDP and Inflation rate are integrated of order I(1) or stationary at first difference.
Hypothesized variables do not have the same order of integration rather a mixture of integration order
zero and one. Therefore, for testing the presence of any type of long run association among selected
factors, Autoregressive Distributive Lag (ARDL) bounds testing technique of cointegration has been
applied. F Statistic Bound Test discloses that the calculated F statistic value is 7.205 which is more
than the upper limit of critical value i.e. 3.21 at 5 % confidence level that confirms the existence of
cointegration relationship between FDI and its determinants comprising of exchange rate, foreign
exchange reserves, market capitalization, inflation and interest rate. The ARDL (2, 1, 2, 0, 0, 0, 1)
model demonstrates the inverse and significant relationship between exchange rate and FDI inflow
into India. Coefficient of foreign exchange reserves is positive which signifies that foreign exchange
reserves have the direct relationship with foreign direct investment but it is insignificant. Gross
Domestic Product (GDP) as a proxy of economic growth has positive and significant association with
FDI. Beside this, Interest rate and market capitalization also have direct and very significant
relationship with FDI. It clarifies that high interest rate and stock market growth both act as
motivator for foreign investors. Negativity of coefficient value of Inflation (WPI) points out instability
in the economy and this type of conditions decrease the level of confidence and discourages FDI
inflows into India. Co efficient of error term i.e. ECM (1) is 0.60624 means equilibrium via error
correction process takes place at higher rate and foreign institutional investments get influenced by
sudden change of preceding period and get adjusted at the speed of 60.62% in the succeeding
period.

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 CHAPTER -1

1.3 FOREIGN INVESTMENT SCENARIO IN INDIA:

India has become a very attractive destination and ranked the second most preferential nation for
investment purpose whereas China is at first place as economically growing persistently (Macmillan,
2010). Foreign investments also encourage the domestic investments in capital scared developing
economies. It is witnessed that as foreign capital inflows domestic investments also rise. Post 1991,
India recognized the importance of foreign investment and adopted the economic reforms tuning with
global scenario and started to open the economy. Thereafter, in India foreign investments are
permitted in two forms; Portfolio Investment and Direct Investment. FPI can be made through foreign
institutional investors in listed or unlisted companies via stock markets whereas FDI is made direct in
companies with the intension to hold the controlling power in company’s management so that
decision making could influence significantly.

India, being in category of high needy of capital, has taken a couple of initiatives to mobilize the
resources from the other countries, consequently it has been succeeded in attracting a total foreign
investment of around 43224 US $ million up to the end of year 2017.

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 CHAPTER -1

1.4 RATIONALE OF FORREIGN INVESTMENT:

India being a developing country requires a lot of capital to upscale its economic activities so that
economic growth could accelerate in a speedy mode. As we know almost developed countries have
tapped their resources as well as home markets. India has huge market in terms of its population as
second largest country in the world after China. Hence it provides the space and scope to foreign
residents or institutions to tap this large market if India opens its doors to free flow of foreign capital.
It will enhance the country’s level of production, trade, competition, employment, utilization of
resources, capital formation, economic growth, technology diffusion, knowledge transfer etc. In
present scenario of globalization, no country can develop itself in isolation and after facing the
economic crisis of 1991, India understands it very clearly. Initially India adopted the narrow base of
foreign capital but now continuously it is being widened and consequently economic growth of
country is rising enormously. As markets are becoming integrated into global economy, all countries
are getting interlinked and providing a better platform to access the resources, markets, technology
and other benefits thereof. Inward of foreign capital has positive impact on industrial and economic
life of the economy. It also up scales the foreign trade of the country by widening the both import as
well as export. Being the keen competition in global market, production units also have the pressure
to improve their quality of products and services. Global level technology is exchanged that brings the
advancement in products and services to be provided in this arena. Research and developments can be
made more extensively with the collaboration of resources and expertise between two countries to
upgrade the available technical procedures which can benefit the both countries. For example, under
nuclear deal between India and USA, nuclear energy is transferred. FDI is entering in Indian
boundaries in form of joint ventures and collaborative units. In addition to the economic aspect, if we
talk of development of particularly human resources, employees of the country seeking foreign capital
will become well versed of global valued skills. FDI scales up the production activities as well as
enlarge the number of industrial units in all corners of the country that creates the more job
opportunities for the people.

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 CHAPTER -1

1.5 BENEFITS OF FOREIGN INSTITUTIONAL INVESTMENT:

Foreign institutional investment encourages domestic investors to save and invest in stock market
because entry of FIIs stimulates trading activities in the securities market. It also increases the foreign
capital in the country without raising debt funds. Some other positive changes are as follows:

• Reduced Cost of Equity Capital

Due to higher diversification benefits for an international investor the systematic risk of investing in
Indian stock market is lower than a local investor who is investing his entire investable fund in Indian
capital market. Therefore, it is believed that the international investors will expect lower risk premium
and allowing FIIs to invest in Indian markets that will cause a reduction in cost of capital. Indian
industries will be benefitted by the availability of cheaper capital.

• Stability in Balance of Payment

To stabilize the balance of payment of the country remains a major concern of any economy. In a
developing economy acceleration of growth requires the excess of domestic investment over the
domestic savings and such difference between both leads to current account in deficit which is funded
by foreign inflows to balance the account of payments. Excessive foreign capital inflows to settle the
current account deficit raises the possibility of economic crisis as faced by India in 1981 and 1991 as
well. However, instead of debt generating flows, foreign capital inflows via portfolio investments in
equities and foreign direct investment is viable and lesser risky to finance the current account deficit.

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 CHAPTER -1

• Acceleration of Corporate Governance Practices

FIIs do not tolerate unprofessional conduct of directors and management as they are very much
familiar with benchmark of corporate governance. In contrast, domestic investors tolerate and accept
the ongoing ill practices of corporate as they do not pay much attention on international bench marks
of corporate governance. As FIIs have entered in securities markets of India, so ongoing ill practices
of corporate houses have been diminished which leads to acceleration of sound corporate governance
practices. Hence it assists in successful implementation of standards of corporate governance.

• Enhance Competition and diminish Uncertainty

Foreign institutional investment always prefers to invest in hedging instruments because they are risk
averters or avoider. It leads to reduce uncertainty prevailing in the market. It also increases
competition and poses the asset in a line which facilitates market stabilization.

• Increase Proficiency of Market

Involvement of foreign institutional investment augments the trading activities (purchase and sale) in
securities market. It also encourages domestic investors to participate in trading activities of market as
entry of FIIs is considered as indication of favorable market conditions.

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 CHAPTER -1

1.6 SUMMARY:

India being a developing country requires a lot of capital to upscale its economic activities so that
economic growth could accelerate in a speedy mode. As we know almost all developed countries have
tapped their resources as well as home markets. India has huge market in terms of its population as
second largest country in the world after China. It will enhance the country’s level of production,
trade, competition, employment, utilization of resources, capital formation, economic growth,
technology diffusion, knowledge transfer etc. Initially, India adopted the narrow base of foreign
capital but now continuously it is being widened and consequently economic growth of country is
rising enormously. Inward of foreign capital has positive impact on industrial and economic life of the
economy. It also up scales the foreign trade of the country by widening the both import as well as
export. Global level technology is exchanged that brings the advancement in products and services to
be provided in this arena. Research and developments can be made more extensively with the
collaboration of resources and expertise between two countries to upgrade the available technical
procedures which can benefit the both countries. FDI is entering in Indian boundaries in form of joint
ventures and collaborative units. In addition to the economic aspect, if we talk of development of
particularly human resources, employees of the country seeking foreign capital will become well
versed of global valued skills. FDI scales up the production activities as well as enlarge the number of
industrial units in all corners of the country that creates the more job opportunities for the people.
Hence, it’s very important to have understanding about the trend and pattern of FDI in India and what
are its parameters which motivate the foreign investors to invest in countries like India.

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 CHAPTER -2

CONTENTS INCLUDED IN CHAPTER 2:

2.1 Introduction
2.2 Literature exploring Determinants of Foreign Capital Inflows in India
2.3 Literature exploring Impact of Foreign Capital Inflow on Indian Stock Market
2.4 Research Gap

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 CHAPTER -2

2.1 INTRUDUCTION:

Every researcher requires attaining the latest information about what exactly has been done in a
particular field of knowledge. So, a careful review of available literature like books, articles, thesis,
and dissertations on that particular problem is a basic step to plan any research. Because, it helps to
identify, select and define the variables which are conceptually and practically important to the
researcher’s interest and objective. It also enables the researcher to avoid duplication and expands the
researcher’s knowledge about the problem. A researcher can precisely express his perspective by
taking into consideration the existing literature related to his topic of research. So, the author has
assessed numerous books, newspapers, magazines, research journals, DIPP’s FDI circulars, annual
reports of ministry of finance, handbook of statistics and RBI annual bulletin and its handbook. The
author has also visited library of MDI (Management Development Institute) at Guru Gram, MDU
central library at Rohtak, Library of DCRUST at Murthal (Sonipat) and UGC record center of social
sciences at New Delhi. Foreign Investment has been standout amongst the most preferred topics
between researchers in the area of international business. Various researchers, business experts and
financial analysts have done outstanding work on the topic of foreign investment. The reviewed
literature in this chapter is divided into two different categories as follows:

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 CHAPTER -2

2.2 Literature exploring Determinants of Foreign Capital Inflows in India:

CAPITAL INFLOWS IN INDIA

Different studies adopted the different methods to explore the determinants of foreign capital inflows
in India as given in table 2.1.

Table 2.1: Patterns of Previous Studies on Determinants of Foreign Capital Inflows

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 CHAPTER -2

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 CHAPTER -2

2.3 Literature exploring Impact of Foreign Capital Inflow on Indian Stock Market

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 CHAPTER -2

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 CHAPTER -2

2.4 RESEARCH GAP

After analyzing the previous studies relevant to the subject, the researcher observed a wide variety in
parameters and results of studies taken into consideration. In the first place, the time period taken by
most of the researchers was moderately shorter and frequency was also low. Further, limited numbers
of independent variables were taken in to consideration for determining their association with FDI.
Furthermore, nobody has studied the impact of the FDI inflow on Indian stock market. Additionally,
only few studies are available on determinants of FIIs inflow in India. Lastly, various time series
techniques were applied without confirming their properties like stationary, serial correlation and so
on. This study is an up gradation over the prior studies in many ways. It has utilized longer sample of
data with lower frequency to examine the performance of securities market after FIIs were allowed
to put resources into Indian Stock market. It aims at examining the impact of FIIs inflow on Indian
stock market in more comprehensive manner by considering more factors such as return, trading
volume and market capitalization. Further, it would also focus on analyzing the impact of Foreign
Direct Investment on Indian stock market and determinants of Foreign Institutional Investment (FII)
into India because very few studies have been made on these topics.

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 CHAPTER -3

CONTENTS INCLUDED IN CHAPTER 3:

3.1 Problem Statement

3.2 Research Objectives

3.4 Research Methodology

3.4 Limitations of the Study

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 CHAPTER -3

3.1 Problem Statement

Most of the countries in the world have recognized the role and relevance of foreign
capital to manage the rapid changes occurred in the economy but the India being a developing country
has shortage of funds which is essential to increase the productivity as well as to maintain the required
level of foreign reserves. In present globalized scenario, foreign capital has been emerged as a main
tool of speeding up the economic activity and to bring other scarce resources like managerial expertise
and technical know-how which enhance the productivity. Prior to 1991, Indian Government didn’t
open its boundaries for foreign investment but after it as India adopted economic reforms of
liberalization, privatization and globalization recommended by IMF, overseas investors started to get
attracted to India as a big platform for making the investments for FDI or FIIs as well and the
financial markets are growing very rapidly in leap and bounds thereafter. Simultaneously Indian stock
markets have also equal chances of getting influenced by such investments. Now it raises a question
that in real which factors are responsible for raising the foreign capital inflows in India and what is its
bearing on stock markets of India.

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 CHAPTER -3

3.2 RESEARCH OBJECTIVES

Present study mainly aims at exploring the various parameters which are responsible for attracting
foreign capital inflows in India and assess its impact on stock market in India. The specific objectives
of the study are as follows:

• To study the patterns of foreign investment in India.

• To identify the various parameters which determine foreign investment inflow in India.

• To assess the impact of foreign investment on Indian stock market.

• To measure the riskiness of Indian stock market.

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 CHAPTER -3

3.3 RESEARCH METHODOLOGY

Research is an innovation in the existing knowledge that goes through a systematic way. It is a
process in which various steps are taken to explore the new knowledge. Research methodology refers
to composition of all methods or procedures which are used to conduct the study. Present research
follows the research methodology given as below to achieve the objectives of the study.

3.3.1 RESEARCH DESIGN

Research aims at discovering the answers of questions applying the scientific procedures. (Kothari,
2004). Research design is the fundamental step of the research methodology from which study begins.
It is a blue print of any study. It may be of different types. Present study adopts the diagnostic research
design because diagnostic research determines the relationship of one variable with some other
variable. Objective of the research is to explore the determinants of foreign investments in India and
its impact on Indian stock market, which is to be measured by establishing the relationship between
the various parameters selected as determinants of foreign capital inflows and foreign investments and
between such foreign investments and Indian stock market to measure the impact therein.

3.3.2 TYPE OF RESEARCH

Nature of present study is descriptive and diagnostic that provides the answer to research objectives
by analyzing the data empirically. Present research can be said empirical because of following
reasons:

• Study is based on quantitative data

• Econometrics has been used to analyze the data in a scientific way.
• Various tests have been applied to validate the results of the study so that they could be
generalized.

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 CHAPTER -3

3.3.3 SAMPLING

Study is based on sampling method. To determine the sample size is a big concern in any study. This
study primarily focuses on exploring the various parameters which are responsible for foreign capital
inflow into India and assessing its extent of impact on stock market of India. Initially constituents of
foreign investment and later representatives of Indian stock market are to be selected. So it can be
classified into two parts as:

• Selection of constituents of foreign investments

• Selection of Indian stock market

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 CHAPTER -3

3.4 LIMITATIONS OF THE STUDY

Present study bears following limitations:

• Sampling

Study uses the sampling method of research not the census. FIIs and FDI have been taken as
representative of foreign capital investment. Further BSE has been taken as representative of
Indian stock market. So study bears all limitations of sampling that may restrict the results to
generalize.

• Study Period
Study analyzes the data of seventeen years that may inadequate to measure the effect of
parameters of long run.

• Availability of Data
Data of the study has been taken from official websites which was not available in the same
frequency as was required. So, proxy of the variable has been taken like Index of Industrial
Production (IIP) has been taken as proxy of GDP.

• Data Type
Secondary data has been taken not the primary. Opinions of market players have not been
considered which would state the market behavior in real sense.

• Macro-Economic Variables
There have been some variables like infrastructure which has not been taken into account
because of time limit of study.

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 CHAPTER -3

• Avoidance of Qualitative Data

Study is purely based on quantitative data, so it ignores the qualitative aspect like political
risk etc.

• Source of Data
Study bears all constraints of secondary data that available in published form.

• Modeling Limitations
Various tools and techniques which have been used to analyze the data in the study have their
own inherent limitations.

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 CHAPTER -4

CONTENTS INCLUDED IN CHAPTER 4:

4.1 TREND ANALYSIS OF FOREIGN INVESTMENT

4.2 FDI IN INDIA

4.3 COMBINATION OF FOREIGN CAPITAL INVESTMENT

4.4 INDIA’S FDI TREND IN GLOBAL MARKET

4.5 CONCLUSION

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 CHAPTER -4

4.1 TREND ANALYSIS OF FOREIGN INVESTMENT

As we know, foreign investment signifies the all funds raised by one country from another country to
meet the financial or production process requirements. In modern era of liberalization, trend of
foreign investment is increasing day by day but some of the countries discourage it on certain
grounds. However, these effects differ country to country.

The second objective of the present research is to study the trend and investment pattern of foreign
investment in India. In order to study this, Least Square Method has been used to measure trend. Pie
charts and graphs have been used to show the investment patterns. Method of linear growth rate and
percentage analysis has been used to show growth during a particular time.

Least square is popularly used technique among the available numerical techniques which is used to
fit a line of trend to a particular data series in a manner that subsequent two points are fulfilled:

• The total of deviations of the actual assessments of Y and calculated assessments of Yt is zero.

• The total of square of the deviations of the actual and calculated assessment is least from line of
trend.

Line of trend acquired by the way of this technique is called as the Line of Best Fit. It can be
expressed in the following manner:

Yt = c + dx

Here, Yt represents calculated or estimated value.

c represents constant or intercept of Y when the value of X = 0.

d represents the slop or coefficient of variable x

Linear Growth Rate can be expressed in the form of following formula:

Yt = A + Bt

Here Yt represents the linear growth rate which is to be estimated.

t = 1, 2, 3, …. n

A represents constant or intercept of Y when the value of X = 0.

B is the linear growth in units of the variable.

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 CHAPTER -4

Foreign capital inflow has taken a quantum jump after implementation of the New Economic
Policy. The pattern of total foreign capital inflow is explained in table 4.1.

Table 4.1 Demonstrates that in year 2001, India obtained an amount of $ 5862 million by the
contribution of total foreign capital inflow which further got increased and reached its peak in year
200708 with the value of $ 43326 million. But following this stable increasing trend there was a
sudden decline in year 200809 and this type of behavior is not favorable to the country. Total of
foreign investment inflows from 2001 to 2017 have been recorded as $ 478788 million that indicates
that doors for foreign capital inflow are opening and foreign investors also seem crazy to participate
in Indian markets.

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 CHAPTER -4

The compounded growth percentage of total foreign capital investment has been estimated and
explained as below.

• Overall Compound Annual Growth from year 2001 2017 has been observed 11.95%
• Compound Annual Growth from year 2001 2008 has been observed 33.08%
• Compound Annual Growth from year 2009 2017 has been observed 21.12%

A transient investigation has been undertaken to reveal a true picture of aggregate foreign capital
inflow in India. The pattern investigation of total foreign investment in the midst of 2001 to 2017
demonstrated in Figure 4.1, shows that there is direct and positive trend line as given below:

y = 3217.x 6E+06.

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 CHAPTER -4

4.2 FDI IN INDIA

Now days, foreign direct investment is being taken as a vital asset for facilitating the industrial growth
and advancement of developing nations in perspective of the way that it provides resources in the
form of capital, innovation, skills, expertise, knowhow, technology etc. Initially Indian doors were not
opened for foreign investment due to adoption of restrictive economic policy but after year 1991,
India modified its policy and followed more extensive procedural changes to extend its rapports with
worldwide economy and took off from the prohibitive strategy towards FDI by adopting a substantial
more liberal exchange arrangement other than changes of capital market and trade controls. On 24th
July 1991 New Economic Policy was formulated which made a remarkable departure regarding to
FDI strategy with the revision of industrial licensing framework. Under new policy license was not
required apart from where requirement was significant or natural concerns, automatic clearance of
foreign direct investment proposals satisfying the predicted conditions, for example: share of
ownership was 50%, 51%, 74% and 100% in foreign equity and opening of new divisions, for
example, mining, insurance, telecommunication, banking, highways and roads, development and
administration of ports, defense& aircrafts tools to foreign ownership organizations dependent on
sector specific limits. Up to 100% Foreign ownership is allowed in majority of manufacturing
divisions in a few segments on direct premise with the exception of equipment’s of defense where it
is restricted to 26% and for things held for manufacturing by small scale businesses where it is
constrained to 24%.

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 CHAPTER -4

4.3 COMBINATION OF FOREIGN CAPITAL INVESTMENT

Foreign capital investment mainly enters into the country in two forms named direct and indirect.
Here, Indirect means Foreign Portfolio Investment (FPI) and direct means FDI Foreign Direct
Investment. Foreign direct investment is an investment which relates to long-term association
showing an enduring control and interest of resident of one economy (direct financial specialist) in
another economy. FPI means the money invested by private people, mutual funds, institutions and
companies in stocks, securities and CDs issued by privately owned businesses and open agencies.
Reasonably, the fundamental distinction between foreign portfolio investment and foreign direct
investment is controlling interest in entities which is found in case of FDI, not in FPI. Controlling
interest indicates the desire of nonresident firm to be associated with host country enterprises in long
run businesses.

An examination of the patterns in FPI and FDI is displayed in Table 4.2

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 CHAPTER -4

Table – 4.2 demonstrates that during 20012003 FDI was in excess of FPI. From 2004 to 2006, huge
increment in foreign portfolio investment was observed which was much larger than foreign direct
investment. Foreign Direct Investment was more prominent than foreign portfolio investment in years
2007, 2009, 2012, 2014, 2016. Foreign Portfolio Investment turns negative in years 2009 and 2016.
FDI ($ 36021 million) in year 2016 and FPI ($ 42205 million) in year 2015 touched their record
highs. FDI was highest in 2016 whereas FPI was not even positive with negative value of $ 4130
million. The correlation demonstrates that the inflows of Foreign Direct Investment have some short
of stability whereas inflows Foreign Portfolio Investment have high level of unpredictability
throughout the study period. The contribution of Foreign Direct Investment was 58 % to total foreign
investment in comparison to FPI which contributes just 42 %. This demonstrates the significant
contribution of FDI in total foreign investment inflow. Hence it can be said that FDI inflows are stable
in nature whereas FPI have shown its unpredictable pattern in fund inflows.

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 CHAPTER -4

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 CHAPTER -4

4.4 INDIA’S FDI TREND IN GLOBAL MARKET

Among the Asia Pacific region, India become most favored destination for foreign direct investment
by replacing China with $63 billion of proclaimed capital investment inward. India expanded its
foreign investments in terms of capital investment as well as number of projects in the year 2015 and
2016 and augmenting its position by overtaking China but it slightly declined in year 2017. It is
shown in Table no. 4.4 –

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 CHAPTER -4

Contribution of India in global FDI which followed an increasing trend from 2003 to 2007 but it
started to decrease in the year 2001 and continued to the year 2003. After 2003 it didn’t decrease till
the year 2012. During the long period of ten years i.e. 2003 to 2012, it didn’t show any decline in FDI
that indicates the positive attitude of foreign investors towards the Indian markets. Again, it began to
diminish in the year 2013, 2014 and 2017. But in year 2011, a boom of FDI in India was witnessed
where India gained more than 2% share in global FDI. It was the first time when India scored such
high ratio in worldwide FDI. Thereafter India reached its top with a contribution of 3.14% share in
international FDI contribution of India in international FDI that posed the India in a commendable
position in the eyes of foreign investors. India's share in global FDI streams expanded from 0.80 % in
2001 to 2.79 % in 2017.

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 CHAPTER -4

4.5 CONCLUSION

An examination of distribution pattern of foreign capital investment inflow has discovered lots of
fascinating facts. After several ups and downs, the total foreign investment inflows from 2001 to 2017
have been recorded as $ 478788 million and its overall compound annual growth till 2017 has been
observed as 11.95% while it has been experienced 17.34 % in total FDI inflow and 43.72 % in total
FII inflow. The distribution pattern of total foreign capital investment demonstrates direct and positive
trend line with the value of y = 3217.x 6E+06.FDI was highest in 2016 while FPI was negative with
the value of $ 4130 million. A correlation of the inflows reveals that FDI inflows present some short
of stability whereas FPI inflows are subject to high unpredictability throughout the study period. FDI
contributed 62% to TFI (Total Foreign Investment) on the other hand FPI was just 38% of total
foreign investment inflow. India's share in worldwide FDI streams demonstrated a steadfast rise from
2004 to 2007 while due to slowdown in the market its percentage share decreased to 1.32 as compared
to global FDI during the year 2009. But in year 2011 India’s share in global FDI once again
progressed and reached its share more than 2% for the first time. India’s share was at its top in 2017
which was 2.79 %. India's share in worldwide FDI streams rose from 0.80 % in 2001 to 2.79 % in
2017.The country wise distribution of total FDI inflows discloses that investments of 10 countries
accounted for 80 percent of FDI inflow. Mauritius and Singapore constitute 32.81 and 16.30% of the
total FDI in India by having the 1st and 2nd position respectively followed by Japan, USA,
Netherlands, Germany, Cyprus, France, and UAE. The regional distribution of FDI inflows shows that
more than 70% of the total FDI received by the eight regional offices. Maharashtra, Delhi (NCR) and
its nearby area received 49% of the total FDI inflow. Maharashtra and Delhi (NCR) attracted
maximum share i.e. 30 and 19 % of total FDI inflow followed by Tamil Nadu (including Pondicherry,
7%), Karnataka (7%), Gujarat (4%), Andhra Pradesh (4%) and West Bengal (1%). Sector wise
distribution of foreign direct investment inflow explains that 60 percent of FDI inflow seems to be
concentrated among the top 10 sectors. the service sector has been emerged as a leading sector by
holding maximum share of 18.08 % followed by construction development (8.82), computer software
and hardware (7.11), telecommunication (6.83), Automobile industry (5.09) and so on. The
contribution of FII in Foreign Portfolio Investment was above ninety percent in consecutive three
years i.e. 2004, 2005 and 2006. This contribution turned down to 46.06 % in year 2008 and in year
2009 and they flight back to their home countries due to global slowdown in the market. These
sudden flight backs cause severe effects such as financial crises in the market.

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 CHAPTER -4

There was again increase in share of foreign institutional investment during the year of 2010 to 2011
and it touched its maximum point in year 2015. In year 2001 India obtained an amount of $ 2135
million by the contribution of foreign institutional investment inflow which further decrease and then
increased and reached at its peak in year 2015. But following this stable increasing trend there were
sudden decline in year 2009 and this type of behavior is not favorable to the economy. The pattern
investigation of foreign institutional investment from 2001 to 2017 demonstrates direct and positive
trend line with the value of 1152.x – 2E + 06. FIIs registered with Securities Exchange Board of India
enhanced from 506 numbers in year 2001 to 1765 numbers in year 2013 which further decreased to
1440 in year 2017. Debt and equity distribution of foreign institutional investment followed no
constant trend but equity share was more in years 2012 and 2015. It touched its maximum point in
year 2015 when the total FIIs investment was of Rs. 2774609 million. In years 2006, 2014, 2016 and
2017, there was a withdrawal of debt fund investment.

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 CHAPTER -5

CONTENTS INCLUDED IN CHAPTER 5:

5.1 Conclusion and Summary of the project

5.2 Findings and implications of the study

5.3 Scope of further research

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 CHAPTER -5

5.1 CONCLUSION:

In present globalized scenario foreign capital has been emerged as a main tool to speed up the
economic activity and to bring other scarce resources like managerial expertise and technical
knowhow which enhance the productivity. Market of India is one of the reckless growing markets in
the globe. It is being recognized by investors as an attention-grabbing place for safer and profitable
investment in the global market. India being a developing economy has insufficient financial
resources and need foreign capital inflow to upscale its economic activities. Now it has become the
need of hour to explore the determinants of such changing scenario of foreign investments. As we
know stock market is an economic barometer of the nation that’s why it also becomes essential to
measure the impact of other countries’ investments on stock market of the home country.

About 100 studies have been reviewed in present study but no answer has been found of the research
quarries. Present study upgrades the prior studies in many ways. It has utilized longer sample of data
to measure the performance of securities markets of India after opening up the boundaries of country
for foreign capital inflows. It also aims at examining the impact of such foreign investments on
movements of stock market in more comprehensive manner. Study takes into account much more
factors responsible foreign capital inflows such as volume of trade, market capitalization and rate of
return as well. Moreover, study adds the value to the existing literature because it is being made in
context of India. Hence results of the study could extend to all developing countries where only few
studies have been made.

Main objective of the research is to explore the determinants of foreign investments in India and its
impact on Indian stock market. Present study adopts the diagnostic research design because diagnostic
research determines the relationship of one variable with some other variable. Study is based on
sampling method. FDI and FIIs both have been selected as representative of foreign investment and
BSE Sensex has been selected as a sample to represent the Indian stock market. Study period has been
taken of seventeen years i.e. 200117 which is adequate to determine the factors responsible for foreign
capital inflows and its impact on Indian stock market in long run.

For analyzing the simple data mathematical tools like ratios, growth percentages etc. have been used.
Being study quantitative in nature, econometrics tools have also been used to explore the factors
determining foreign investments in India and measure its impact on Indian stock market. Further to
validate the applicability of econometrics models some diagnostic checks like stationarity (ADF) and
normality (Jarque Berra Statistic) test has been applied.

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 CHAPTER -5

After that on the basis of these applicability results econometrics tools & models such as ARDL
Bound test, Vector Error Correction model, Engle and Granger test, Ordinary Least Square model and
GARCH (1,1) model have been applied as per the requirement of objectives. At the end some tools
like CUSUM Test, Serial correlation and Heteroskedasticity test have been applied to confirm the
stability of models.

Present study comprises four objectives and separate technique has been applied to analyze each
research objective. As per the time series econometrics rule, first of all stationarity of each data series
has been checked separately and on the basis of which, suitable methods are decided.

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 CHAPTER -5

5.2 FINDINGS AND IMPLICATIONS OF THE STUDY

Present study has following implications:

• Present study explores that GDP has positive and significant relationship with the FDI that
indicates that GDP of the country is a major concern to foreign investors. Hence it is
recommended to policy makers to promote the manufacturing units to enhance its level of
production and customer base that will attract the more and more foreign inflows in India.
Further as more investments have been made in service area than manufacturing by the
foreign investors which is also a point of attention for the policymakers to boost the service
market much more and find the reasons thereof.

• WPI or inflation has negative and significant relationship with both foreign direct and
institutional investment. Negativity of coefficient value of inflation (WPI) points out the
instability in the economy and this type of conditions decrease the foreign investors’
confidence and, in this manner, discourages FII inflows into India. Therefore, RBI should
frame its monetary policy in such a manner so that inflation could be controlled without
affecting development agenda of the economy.

• As foreign exchange rate determines the ranking of the economy on global map. Since a long
time, exchange rate of India is diminishing persistently, which has negative impact on both
FDI as well as FII but the Govt. of India has been failed to control such decrease in it that’s
why foreign investors hesitate to invest here. Hence the Union Government should take some
more strict measures and initiatives to curb it.
• As per results of the study, interest rate also plays a significant role in foreign inflows. High
interest rate in host country always remains in favor of foreign residents in both hands i.e. in
terms of lending as well investing. High interest rate makes the availability of funds costly to
domestic investors which provide the opportunities to foreign investors. Same has been
proved in present study as interest rate is positively correlated with FDI. Further interest rate
also has a significant impact on market capitalization which is the indicator of growth of
Indian stock market which is the economic barometer of the any economy.

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 CHAPTER -5

• Market risk has negative but insignificant correlation with FII which can be interpreted in two
manners one, foreign institutional investors are not risk averse or second risk management
system of the market is strong.

• Present study confirms that FII makes the Indian stock market volatile on certain aspects but
FIIs are not sole market participant but other players i.e. gamblers and speculators are also
therein. Therefore, being the SEBI, the watch dog of stock market should curb such
speculative practices to encourage the real investors.

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 CHAPTER -5

5.3 SCOPE OF FUTURE RESEARCH

Present study is subject to certain limitations, which provides a scope for further research in this area.
Study is based on secondary data, so new research will add value to this if it is made on the basis of
primary data collected from market participants either in form of questionnaire, interviews and
discussions with them because market participants can elaborate the market conditions more precisely
and extensively. Present study is made in context of India only that limits the generalization of results
to all developing countries because each country has different and diverse domestic conditions, so it
also provides the space to add some more developing countries in sample to make it universally
applicable. Further study takes into account the parameters of foreign capital inflows like GDP,
foreign exchange rate, interest rate, inflation, foreign exchange reserves etc. as independent variables
which have been used in previous studies. Much more factors could be explored through the factor
analysis. Hence present study has a limited research arena being the constraints of time and resources,
so it opens the scope to prospective researchers for updating it in more concrete manner.

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 CHAPTER -6

CONTENTS INCLUDED IN CHAPTER 6:

6.1 References and Bibliography

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 BIBLIOGRAPHY AND REFRENCES

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• Brooks, C. (2008). Introductory Econometrics for Finance. Cambridge University Press,

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 END OF THE REPORT

PRESENTED BY:

SMRATI SHRIVASTAVA
BCOM(VOC) INS.III YEAR
Roll No.-2200030911296
Enroll. No: A-21109698

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