Finance

VOLATILITY IN INDAIN STOCK MARKET AND FOREIGN INSTITUTIONAL INVESTORS

Many developing countries, including India, restricted the flow of foreign capital till the early 1990s and depended on external aid and official development assistance. Later, most of the developing countries opened up their economies by dismantling capital controls with a view to attracting foreign capital, supplementing it with domestic capital to stimulate domestic growth and output.

Since then, portfolio flows from foreign institutional investors (FII) have emerged as a major source of capital for emerging market economies (EMEs) such as Brazil, Russia, India, China and South Africa. Besides, the surge in foreign portfolio flows since 1990s can be attributed to greater integration among international financial markets, advancement in information technology and growing interest in EMEs among FIIs such as private equity funds and hedge funds so as to achieve international diversification and reduce the risk in their portfolios.

Economic growth is a function of, among other things, capital formation. As FII flows are a source of non-debt creating capital for the economy, many EMEs have been competing with each other to

attract such flows through flexible investment norms/regulations or by offering fiscal sops. Further, FIIs have been assured decent returns on their investments, enabling continuous and sustainable investment flows. FII flows into India registered substantial growth from a meagre US$4 million in 1992–93 to over US$ 32 billion in 2010–11 (SEBI, 2011: 76). FII inflows underwent a see-saw movement in India during the last decade. They registered spectacular growth especially since the middle of 2003 due to the higher growth rate in Indian GDP, robust corporate performance and an investment-friendly environment. Portfolio investment flows into India turned negative (outflow of US$ 12 billion) during 2008–09 (ibid.) mainly due to the heightened risk aversion of foreign...