Dynamics of Indian Stock Market – Role of Domestic Institutional Investors – A Causality Study

Indian stock market being one among the top performing stock markets of the world has been attracting substantial amount of institutional investments from the last one decade. The increasing participation of institutional investors has assumed to have steadily controlled the investment scenario of the stock market. The present article examines the short-term and long-term causal relationship between Domestic Institutional Investors (DIIs) and Indian stock market. The study uses the monthly time series data on advances to declines ratio (ADR) of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), and purchases to sales ratio of DIIs. The sample period spans from April 2007 to December 2013. To attain the intent of the study, the article employs the empirical techniques such as Unit root tests, co-integration tests and VECM as part of research methodology. From the result of co-integrating relationship it is found that the variables understudy are co-integrated which holds that there is long run association between the variables. Moreover, the empirical results of VECM confirm a unidirectional long run causality running from DIIs to Indian stock market. Also, it is evident from the test results that there is no short-run bidirectional relationship running between DIIs and Indian stock market.