Do Foreign Institutional Investors Really Drive the Indian Stock Market?

Abstract

It is, generally, argued that we can attribute the rise and fall of stock market to the flow of funds and investment by Foreign Institutional Investors (FII). The Indian stock market is visited by three major players—FIIs, Mutual Funds (MF) and Domestic Institutional Investors (DIIs). This article lays down the analytical framework for comparing the nature and role of the three players. It uses a framework for empirically testing the impact of each player on the stock market. Through a set of Granger causality tests, it verifies the popular hypothesis that FIIs dominate the Indian stock market. The results are quite startling. Our results show that FIIs are not the only active players who have an influence in Indian stock market even DIIs have an influence, whereas Mutual funds are the passive players. FIIs are essentially opportunistic agents who do not cause any fundamental change in the market but themselves opportunistically gain from the market.