RELATIONSHIPS AMONG FOREIGN INSTITUTIONAL INVESTMENTS, STOCK RETURNS AND CURRENCY CHANGE-OVER RATES IN INDIA

India from a conservative macroeconomic policy has gradually shifted focus towards attracting foreign capital. From September 14, 1992, with suitable controls, it allowed foreign investors to invest in primary and secondary capital markets in India and foreign funds started flowing from the year 1993. Foreign Institutional Investments has steadily grown from $11,268 million in March 2000 to $62,464 million in July 2009. Foreign fund flow increases demand for good stocks causing upward movement in stock prices. Currency changeover rates also influence foreign investments as Foreign institutional investors calculate returns in foreign currencies. In this study, we explored relations between foreign investment in India with that of stock prices in the domestic market and domestic currency changeover rates. Using daily data for the period January 2000 to July 2009, the study examined cause-effect relations and long-term relations among the series. Most of the studies in Indian market reported that domestic stock returns attract foreign fund flows but foreign flows do not cause stock returns in India. The results of this study using data for past nine and half years however detected bidirectional causality.