Macroeconomics Case Study

FII In India: Is It Making The Economy Vulnerable?

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Abstract:
The Indian government stretched the upper limit on FII (foreign institutional investment) in both the government and corporate sector. This move was expected to boost the Indian stock market, as more foreign investment was expected to flow into the capital market. However it was argued that India's reliance on FIIs to create a large foreign exchange market might ultimately make the economy vulnerable. The reversal of the flows might destabilise the exchange rates, affect the economy's financial sector and ultimately disrupt the economy.

Pedagogical Objectives:

• To understand FII and its significance as a source of foreign capital in emerging capital markets.
• To understand the pre- and post-liberalisation scenario in India and the policies adopted by government to attract FII.
• To understand the relationship between the FII inflow and the Indian stock market and the volatility associated with the inflow of FII.

Keywords :  FII inflows, Emerging capital market, Post liberalisation period, Stock market, SEBI registration, Liquidity, Financial crises, Contagion effect, Foreign exchange reserves, Currency appreciation, Export competitiveness, Current account deficit, Structural changes