Relation between Foreign institutional investments and Macro-economic factors - a case study

The foreign institutional investments (FII's) have had a very significant impact on the domestic stock market and the real economy since their arrival in India in 1993. Therefore, it is necessary to understand the factors that boost FII's inflows into the country. This study makes an attempt to understand the dynamics of trading behavior of FII with Indian equity market. The present study examines the causal relation between FII's, stock market return and other macro economic variables such as exchange rate, money supply, interest rate, IIP and WPI for a period of 9 years ranging from January 2005 to December 2013 to find out the possible determinants of FII's in India. For this purpose we have applied Granger Causality Test to check causal effect of FII with macro economic factors in India and a comparison of Granger causality test is carried out with the help of Neural network. This paper also makes an attempt to find gap analysis between FII cap allowed and FII investment happened.