DETERMINANTS OF FOREIGN PORTFOLIO INVESTMENT AND THEIR EFFECTS ON THE INDIAN STOCK MARKET

This article aims at focusing on the facts in the financial series of Foreign Portfolio Investment (FPI) and its determinants. The study considers Exchange Rate, Consumer Price Index, Index of Industrial production, SENSEX, NIFTY and Foreign Exchange Reserve as determinants. The FPI regime commenced on June 01, 2014 to harmonize different routes for foreign portfolio investments i.e. Foreign Institutional Investors (FIIs), Sub Accounts and Qualified Foreign Investors, uniform entry norms, adoption of risk based know your customer (KYC) norms etc. The monthly Data of variables were collected from the websites, addressing bseindia.com, https://in.investing.com /indices/s-p-cnx-nifty-historical-data, stats.oecd.org, SEBI and www.rbiindia.com for the period from Jun 2014 to Dec 2016. The effect of Foreign Portfolio Investment (FPI) is analysed with its determinants for Correlation, Co-integration and Casual relationships for the period after the introduction of the FPI Regime. The first order differences of the variables were tested. The Co-Integration test gives the existence of one Co- integrating variable vector in the equations. The Equation at none shows the p-value of 0.000 in both trace and Lmax test and confirming one co-Integrating vector and there is a long- run relationship among variables and hence the null hypothesis of no Co-Integration is rejected. The Granger causality gives the result that we can accept the null hypothesis that FPI does not granger cause and effect ER. But the null hypothesis is rejected that ER does not cause and effect FPI and there is a unidirectional relationship between the variables. There are no causalities between FPI and CPI/IIP/SENSEX/NIFTY/FER and vice-versa. The study has suggested that though FPI has many advantages to the country but it should have certain limit that should not lead to inflation where the prices may go up.