Foreign Institutional Investments and Liquidity of Stock Markets: Evidence from India

Abstract

Indian economy has experienced rapid economic growth rate and higher foreign institutional investment (FII) inflows over the decade 2001–2010.This paper examines the impact of Foreign Institutional Investments upon Indian stock market liquidity. Foreign institutional investments contributed for the growth of stock market activity in India. FII flows had significant positive impact on Market capitalisation, volume and value traded in the Indian market. However the empirical results indicate that Foreign Institutional Trading significantly influences market liquidity in a negative direction. Foreign Investments were found to granger cause market liquidity. A 1% change in the gross purchases in the current week will result in 0.10% decrease in the liquidity of the following week, whereas a 1% change in sales would result in 0.12% similar change. Results support the argument that across the emerging markets FIIs result in excess market volatility and lower liquidity.