Foreign & Domestic Institutional Investment and Stock Market Returns in India – A Causal Study

Foreign institutional investment is the amount of funds invested by institutions such as pension funds and asset management companies incorporated outside India. These institutions have to register with RBI to make portfolio investment in Indian capital market. Domestic institutional investment on the other hand represents the funds invested by institutions such as insurance companies and mutual funds in India. Foreign institutional investment and domestic institutional investment are among the important factors influencing the capital formation and stock market returns. This study focuses on analyzing the causal relationship among foreign institutional investment, domestic institutional investment and stock market returns in India. Granger causality test and ADF test were used in this study. The study covers a time period of 8 years from 2007 to 2015. The results show one way casual relationship between stock market returns and Foreign and domestic institutional investment and two way relationship between the Foreign institutional investment and domestic institutional investment. Hence, the Indian stock market returns significantly influences the amount of foreign and domestic institutional investment. But institutional investments do not significantly influence the stock market returns during the study period. Similarly the foreign institutional investment and domestic institutional investment significantly influence each other in Indian capital market during the study period