Stability of FII inflows into India

Abstract

The recent rise in FII inflows into the country has raised concerns about their stability. This is an important concern since a sudden reversal of FII flows could cause a number of severe repercussions for the economy. There have been a number of articles in the business on this very subject. And opinion seems to be divided about whether or not FII inflows are here to stay. Given this background, the purpose of this study was to determine whether this recent trend of FII flows is stable. The first part of our study involved background research and a survey of the existing literature on the subject. This part revealed that FII flows into a country are determined broadly by a set of push and pull factors. The exact set of factors seemed to defer based on the time and region of the study. The second segment of our study was involved in developing a regression-based model to identify that factors that determine the current inflows into India over a short and long term. This analysis revealed that the major factors that determine short-term flows are - o Market Capitalization of the BSE Sensex in the previous period o US interest rates o Trade volume as a ratio of market capitalization of the BSE Sensex stocks in the previous period o Trade volume of the BSE Sensex stocks in the previous period o Indian interest rates Long-term flows are in turn are determined by - o EuropeanUnion interest rates o 6m forward premiums of INR vs. Dollar o India’s external debt Based on the current projections of these factors, we concluded that FII inflows into the country are not going to reverse.The third part of our study involved the use of comparables based valuation to determine whether Indian equity is undervalued. The results of this analysis again indicated that FII flows are most likely going to remain the same or increase in the future. The last section of our report looks at the region-wise and country-wise preference of FII flows. Here we tried to analyze the pull and push factors that would affect the FII inflows into India. We also compared India with China and came up with alternative situations and the behaviour of FIIs in each of those situations. In conclusion, our analysis shows that the current bout of FII inflows in the country is likely to be stable and we expect flows to remain the same and even increase in the future.