Foreign institutional investors and the Indian capital market

Type :

Theses

Pages :

61 pages

Format :

.doc

Published date :

05/10/2009

Category :

Economics & finance

Sub category :

Finance

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Summary :

Introduction
Background study
Research review
Research methodology
1. Research process
2. Scope of the study
Descriptive work
1. Regulatory information
2. Foreign institutional investor flow in India (FII)
3. Determinants of FII
Data analysis and interpretation
1. Conceptual model for analysis
2. Gap analysis for investment avenues
3. Findings
Conclusion
Suggestion

Abstract

foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. After the opening up of the borders for capital movement, these investments have grown in leaps and bounds. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. In developing countries there has been a great need for foreign capital, not only to increase the productivity of labor but also because foreign capital helps to build up the foreign exchange reserves needed to meet trade deficits. foreign investment provides a channel through which developing countries can gain access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional investment (FII). foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. The present study examines the role, impact and relationship of FII's and indian capital market, and also determinants of foreign institutional investment in India, a country that opened its economy to foreign capital following a foreign exchange crisis. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991. Up to the end of January 2003, India succeeded in attracting a total foreign investment of around U.S.$48 billion out of which U.S.$12 billion was in the form of FII. These figures show the importance of FII in the overall foreign investment program. India is in the process of liberalizing its capital account, and this has a significant impact on foreign investment and particularly on FII, which affects short-term stability in the financial markets.