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DETERMINANTS OF FOREIGN INSTITUTIONAL INVESTMENT IN INDIA: THE ROLE OF RETURN, RISK, AND INFLATION
Author(s) -
RAI Kulwant,
BHANUMURTHY N. R.
Publication year - 2004
Publication title -
the developing economies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.305
H-Index - 30
eISSN - 1746-1049
pISSN - 0012-1533
DOI - 10.1111/j.1746-1049.2004.tb00246.x
Subject(s) - economics , monetary economics , volatility (finance) , inflow , stock (firearms) , stock market , ex ante , foreign direct investment , institutional investor , financial economics , finance , macroeconomics , geography , corporate governance , context (archaeology) , archaeology , meteorology
The present study examines the determinants of foreign institutional investments (FII) in India, which by January 2003 almost exceeded U.S. $12 billion. Given the huge volume of these flows and their impact on the other domestic financial markets, understanding the behavior of the flows becomes very important, especially at a time of liberalizing the capital account. By using monthly data, we found that FII inflow depends on stock market returns, inflation rates (both domestic and foreign), and ex‐ante risk. In terms of magnitude, the impact of stock market returns and the ex‐ante risk turned out to be the major determinants of FII inflow. Unlike some of the other investigations of this topic, our study has not found any causative link running from FII inflow to stock returns. Stabilizing stock market volatility and minimizing the ex‐ante risk would help to attract more FII, an inflow of which has a positive impact on the real economy.