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ABSTRACT
Foreign capital is very important especially in developing countries like India. One of the ways to receive this is through a Foreign Institutional Investor (FII). FIIs are basically investors located outside the country in which they are investing. India being one of the largest growing economies with a GDP growth rate of 7.2% in Q3 2017-2018, attracts a huge amount of FIIs. The flows of FII investments have an impact on the volatility and stability of the Indian stock market. After demonetization in India there was major pullback of FII investments. Events like this have a great effect on the economy and in turn the stock market. This paper studies the impact of FIIs on Nifty 50 from July 2015 to February 2018 by dividing it into pre and post demonetization periods. Tools like ADF test, Granger's causality test, correlation and regression have been used. The results showed a moderately positive correlation between the two variables. There was no causality before demonetization, but causality was seen after demonetization. A regression equation has been formulated to determine the relationship between FII and Nifty 50 after demonetization.
Introduction
A foreign institutional investor is an investor registered in a country other than that in which it invests. ("FII | Investopedia," n.d.) FII is defined as "an institution established or incorporated outside India which proposes to make investment in India in securities, provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor." by SEBI (Ram, Mridul, & Ankur, 2013)
Countries with the largest volume of FIIs are those with developing economies. These economies provide greater growth potential for investors than mature economies. Due to this, these investors are more common in India.
After liberalisation in the 1990s, from September 14th 1992, FIIs are allowed to invest in securities traded in India. ("FII | Investopedia," n.d.)
Government of India establishes investment limits for FIIs as the capital flows can affect exchange rate of a national currency, a quick withdrawal causes decline in the purchasing power of a currency. Such rapid and quick withdrawals can cause economic crisis. (Ram...