Impact of FDI & FII on Indian Stock Markets

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA). This step was taken to add some source of capital formation in India as other developing economies were already in this practice. As a result inflow of Foreign Capital has become striking measure of economic development in both developed and developing countries Now the developing countries are witnessing changes in the composition of capital flows in their economies because of the expansion and integration of the world equity market. FDI and FII thus have become instruments of international economic integration and stimulation. The Indian stock markets are also experiencing this change. FDI & FII are becoming important source of finance in developing countries including India. It is widely assumed that FDI & FII along with some other external factors such as global economic cues, Exchange rate and Internal factors such as demand and supply, market capitalization, EPS generally drive and dictates the Indian stock market. The current paper makes an attempt to study the relationship and impact of FDI & FII on Indian stock market using statistical measures correlation and regression analysis. Sensex and CNX Nifty were considered as the representative of stock market as they are the most popular Indian stock market indices. Based on 10 years data starting from 2002 to 2011, it was found that the flow of FDI has no significant impact on stock market but FII in India determines the trend of Indian stock market.