A

PROJECT REPORT

ON

“ANALYTICAL STUDY OF IMPACT OF FOREIGN

INSTITUTIONAL INVESTORS (FIIS) ON EXCHANGE RATE AND
VALUE OF INDIAN NATIONAL RUPEE (INR) IN TERMS OF
VOLATILITY”
 INDEX

S.NO. PARTICULARS PAGE NO.

1 INTRODUCTION

INTRODUCTION OF FII

NEED OF THE STUDY

OBJECTIVE OF THE STUDY

SECONDARY DATA

SCOPE OF THE STUDY

LIMITATIONS

2 REVIEW OF LITERATURE

3 INDUSTRY PROFILE

COMPANY PROFILE

4 DATA TABULATION

5 CONCLUSION
 INDEX

S.NO. TITLE OF TABLE PAGE NO.

4.1 NET FII INVESTMENT FROM 1st APRIL 2010 TO

31st MARCH 2017

4.2 EXCHANGE RATE (MONTHLY POSITION)

FROM 1ST APRIL 2010 TO 31ST MAR 2017

4.3 NET INVESTMENT

 INDEX

S.NO TITLE OF GRAPH PAGE

NO
4.1 NET FII INVESTMENT (CLOSIG INVESTMENT OF
FII: FROM
30TH APRIL 2010 TO 30TH MAR 2011
4.2 30TH APR 2011 TO 30TH MAR 2012
4.3 30TH APR 2012 TO 30TH MAR 2013
4.4 30TH APR 2013 TO 30TH MAR 2014
4.5 30TH APR 2014 TO 30TH MAR 2015
4.6 30TH APR 2015 TO 30TH MAR 2016
4.7 30TH APR 2016 TO 30TH MAR 2017
4.8 EXCHANGE RATE AT THE END OF THE EVERY
MONTH FROM 30TH APR 2010 TO 31ST MAR 2011
4.9 30TH APR 2011 TO 31ST MAR 2012
4.10 30TH APR 2012 TO 31ST MAR 2013
4.11 30TH APR 2013 TO 31ST MAR 2014
4.12 30TH APR 2014 TO 31ST MAR 2015
4.13 30TH APR 2015 TO 31ST MAR 2016
4.14 30TH APR 2016 TO 31ST MAR 2017
 Chapter No.1

EXECUTIVE
SUMMARY
 Chapter No.1

Introduction
 FII (Foreign Institutional Investors)

Foreign institutional investor means an entity established or incorporated outside

India for the purpose of making investments into the Indian securities market under the
regulations prescribed by SEBI. Positive tidings about the Indian economy combined
with a fast-growing market have made India an attractive destination for foreign
institutional investors.

‘FII’ include “Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio manager,
university funds, endowments, foundations, charitable trusts, charitable societies, a
trustee or power of attorney holder incorporated or established outside India proposing to
make proprietary investments or investments on behalf of a broad-based fund. FIIs can
invest their own funds as well as invest on behalf of their overseas clients registered as
such with SEBI. These client accounts that the FII manages are known as ‘sub-accounts’.
A domestic portfolio manager can also register itself as an FII to manage the funds of
sub-accounts.

Foreign Institutional Investors (FIIs) are entities established or incorporated

outside India and make proposals for investments in India. These investment proposals by
the FIIs are made on behalf of sub accounts, which may include foreign corporate,
individuals, and funds etc. In order to act as a banker to the FIIs, the RBI has designated
banks that are authorized to deal with them. The biggest source through which FIIs invest
is the issuance of participatory Notes (P-Notes), which are also known as offshore
Derivatives.

Foreign Investment refers to investments made by residents of a country in

financial assets and production process of another country. After the opening up of the
borders for capital movement these investments have grown in leaps and bounds. But it
had varied effects across the countries. It can affect the factor productivity of the recipient
country and can also affect the balance of payments[BOP]. In developing countries there
was a great need of foreign capital, not only to increase their productivity of labour, but
also helps to build the foreign exchange reserves to meet the trade deficit. Foreign
investment provides a channel through which these countries can have access to foreign
capital. It can come in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio
Investment (FPI).
Need of the study

In this project we will try to understand the concept of the Foreign Institutional
Investment (FII) and their role and effect on the exchange rate of Indian Rupee means the
fluctuation in FII investment affects the value of exchange rate or not.

In order to understand the role and effect of the FII on Indian Rupee we need to
know in brief about the Foreign Institutional Investment and Exchange Rate of Indian
National Rupee.

Foreign Direct Investment [FDI] involves in the direct production activity and
also of medium to long-term nature. But the Foreign Portfolio Investment[FPI] is a
short-term investment mostly in the financial markets and it consists of Foreign
Institutional Investment (FII). The FII, given its short-term nature, might have bi-
directional causation with the returns of other domestic financial markets like money
market, stock market, foreign exchange market etc. Hence, understanding the
determinants of FII is very important for any emerging economy as it would have larger
impact on the domestic financial markets in the short run and real impact in the long run.
The present study examines the determinants of foreign portfolio investment in the Indian
context as the country after experiencing the foreign exchange crisis opened up the
economy for foreign capital.

India, being a capital scarce country, has taken lot of measures to attract foreign
investment since the beginning of reforms in 1991. Till the end of January 2010 it could
attract a total foreign investment of around US$ 48 billions out of which US$ 23 billions
is in the form of FPI. FII consists of around US$ 12 billions in the total foreign
investments. This shows the importance of FII in the overall foreign investment
programme. As India is in the process of liberalizing the capital account, it would have
significant impact on the foreign investment and particularly on the FII, as this would
affect short-term stability in the financial markets. Hence, there is a need to determine the
push and pull factors behind any change in the FII, so that we can frame our policies to
influence the variables which drive-in foreign investment. Also FII has been subject of
intense discussion, as it is held responsible for intensifying currency crisis in 1990’s
elsewhere.

The present study would examine the determinants of FII in Indian context. Here
we make an attempt to analyze the effect of return, risk and inflation, which are traced to
be major determinants in the literature on FII. The proposed relation (discussed in detail
later) is that inflation and risk in domestic country and return in foreign country would
adversely affect the FII flowing to domestic country, where as inflation and risk in
foreign country and return in domestic country would have favorable affect on the same.
In the next section we would briefly discuss the existing studies. In section 3, we discuss
the theoretical model. Section 4 briefly discusses the trends in FII in India. Database and
methodology adopted in this study are discussed in Section 5. In section 6, we discuss the
estimated results and conclusions are drawn accordingly in the last section.
 OBJECTIVE OF THE STUDY

 To analyze the impact of the investment made by FIIs on exchange rate of Indian
rupee.

 To study the scope and trading mechanism of Foreign Institutional investors in India.

 To find the relationship between the FIIs equity investment pattern and Exchange
rates.

 To Calculate the volatility in term of standard deviation.

RESEARCH METHODOLOGY

PROBLEM DEFINITION

To analyze the impact of investment made by Foreign Institutional Investors (FII)

on the Exchange rate of Indian Rupee. FII make investment India what is its effect on
Exchange Rate it can be increase or decrease.

RESEARCH DESIGN

Research Design is the plan structure and strategy of investigation conceived so as

to obtain answers to research problems. It is specification of methods and procedures for
acquiring the information needed.

In this project Causal Research Design has been used to analyze the cause and
effect relationship between the variables.

Causal research design is applied to find out the impact of independent variable
investment made by FII on various dependent variables related to Exchange rate of
Indian rupee.
These dependent variables include:

 Closing values of Exchange rate

 Volatility i.e., Standard Deviatio

 DATA COLLECTION

The Secondary sources have been used for the collection of the data used in the research.

Secondary Data:

Secondary data may be defined as the data that has been collected earlier for some
purpose other than the purpose of the present study. Any data that is available prior to the
commencement of the research project is secondary data, and therefore secondary data is
also called as the historical data.

SCOPE OF THE STUDY

Scope of the study is very broader and covers the impact of foreign institutional
investors on exchange rates. But, study is only going to cover Net foreign investments
and exchange rates in form of equity. The time period is taken from financial year
beginning to ending i.e. April 2010 to March 2017 as it will give exact impact in both the
bullish and bearish trend.

LIMITATIONS

1. The result obtained through the regression equation has not accurate. There is
probability of occurrence of error. The error is known as the Standard Error denoted by
the S.E. The standard error value is 2.62 in case of the regression equation of Net FII
investment on Exchange Rate, Y=0.576x-18992,which indicates that the estimated FII
investment for an expected Exchange Rate can be either more or loss by Rs.2.650 crore.

2. The relationship of FII investment and Exchange Rate denoted by the Coefficient of
Correlation has a probable error with it. The value of Coefficient of Correlation is 0.133
and the probable error is 0.672 it can be increase or decrease an exchange rate by Rs.
0.672.
3. The calculated values are taken up to 3 decimal places only. Actual value can be
changed if complete values are taken into account.

CHAPTER 2
REVIEW OF LITERATURE

Chakrabarti, Rajesh (2001) analyzed FII flows and its relationship

with other economic variables. Net FII inflows between January 1993 and December
1999 were taken for analysis. The empirical investigations of FII flows found that FII
flows were correlated with returns in Indian market (BSE). There appears to be
significant differences in nature of FII flows before and after Asian crisis. Granger
causality test revealed that FII flows were more an effect than a cause of market returns
in India.

Srivastva, Madhuri (2002) concluded that capital/technology intensive sectors

were attracting significantly higher share of the total foreign investment as compared to
labour intensive sectors such as food-processing industries, hotels, tourisms and textiles.
Further they found that foreign investment does not have any considerable impact on the
macro economic variables in the Indian context.

Mukherjee, Paramita et al (2002) explored the relationship of foreign institutional

investment flows to the Indian equity market based on a daily data-set for the period
January 1999 to May 2002. The research also made an attempt at relating FII flows to
macroeconomic fundamentals for the Indian economy. Using Regression and Granger
Causality test it was identified that FII flows to and from the Indian market tend to be
caused by return in the domestic equity market and returns in the Indian equity market is
indeed an important factor that influences FII flows into the country. Also FII sale and FII
net inflow are significantly affected by the performance of the Indian equity market; FII
purchase is not responsive to this market performance. The return from exchange rate
variation and fundamentals of the Indian economy may have influence on FII decisions,
but such influence does not seem to be strong.
Bose, Suchismita and Coondoo, Dipankar (2004) examined the impact of the FII
policy reforms on FII portfolio flows to the Indian stock markets. The impact of the FII
policy reforms on FII portfolio flows to the Indian stock markets during the period
January1999 to January 2004 were examined, through a multivariate GARCH regression
model and techniques of time series intervention analyses. The range of policies
considered were liberalisation policies as well as restrictive ones taken to assure stability
of flows. The results strongly suggested that liberalisation policies have had the desired
expansionary effect. It was also noticed that the restrictive measures aimed at achieving
greater control over FII flows also do not show any significant negative impact on the net
inflows.

Coondoo, Dipankar and Mukherjee, Paramita (2004) provided descriptive

decomposition of observed volatility into three components namely strength, duration
and persistence of volatility. This illustration was made with aid of daily observations of
three variables viz stock return (BSE), interbank call money rate and FII pertaining to
India from January 1999 to may 2002. Stationarity of data was tested using ADF unit test
procedure. Volatility of variable was empirically examined using GARCH models.
 Rai and Bhanumurthy (2004) examined the determinants of foreign institutional
investments in India and their impact on BSE from Jan. 1994 to Dec. 2002. By
employing ARMA, GARCH and TARCH model on the data, they concluded that FII
inflows depend on stock market returns, inflation rates (both domestic and foreign) and
ex-ante risk. The researchers also suggested that stabilizing stock market volatility and
minimizing the ex-ante risk would help to attract more FII to India.

Knill, A.M. (2004) in his paper examined the impact of foreign portfolio
investment on the financial constraints of smaller firms. The research utilized a panel of
firms from around the world which included a number in excess of 1, 87,000 firmyear
observations from 53 countries. The research results supported the contention that foreign
portfolio investment does help to bridge the ‘financing gap’, the need of external capital,
through the capital markets. There is no evidence supporting an indirect path of foreign
portfolio investment reaching smaller firms through bank lending.

Banerjee and Sarkar (2006) have attempted to forecast stock return volatility
using intra-day data of NSE from June 2000 through January 2004 by employing the
GARCH model. The findings revealed that participation of FIIs in the Indian stock
market does not result in significant increase in market volatility.

Upadhyay, Saroj (2006) found in their study that FII flows supplements domestic
investment without increasing the foreign debt of our country. It was noticed that when
FIIs purchase and sell the stocks there is a high degree of volatility in the stock market.
The researchers argue that the volatility is due to the fact that the FIIs manipulate the
situation of boom in such a manner that they wait till the index rises up to a certain height
and exit at an appropriate time.

Kumar, SSS (2006) examined the role of institutional investors in Indian stock
market from 1993 to 2005. After applying unit root test, OLS regressions were employed
and results indicated that institutional activity has an influence on stock market. Granger
causality test showed that for any market rise or fall the FIIs follow the suit.
Entry Option for FII’S

A foreign company planning to set up business operations in India has the following
options:

1. Incorporated Entity

By incorporating a company under the Companies Act,1956 through

• Joint Ventures; or

• Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 170% depending on the

requirements of the investor, subject to equity caps in respect of the area of activities
under the Foreign Direct Investment (FDI) policy.

2. Important terms to know about FIIs:

Sub-account :

Sub-account includes those foreign corporations, foreign individuals, and

institutions, funds or portfolios established or incorporated outside India on whose behalf
investments are proposed to be made in India by a FII.

Designated Bank:

Designated Bank means any bank in India which has been authorized by the
Reserve Bank of India to act as a banker to FII.

Domestic Custodian:

Domestic Custodian means any entity registered with SEBI to carry on the activity
of providing custodial services in respect of securities.

Broad Based Fund:

Broad Based Fund means a fund established or incorporated outside India, which
has at least twenty investors with no single individual investor holding more than 17%
shares or units of the fund. Provided that if the fund has institutional investor(s) it shall
not be necessary for the fund to have twenty investors.
If the fund has an institutional investor holding more than 17% of shares or units in the
fund, then the institutional investor must itself be broad based fund.

3. Unincorporated Entity

As a foreign Company through

Liaison Office/Representative Office
Project Office
Branch Office

4. FOREIGN INSTITUTIONAL INVESTORS REGISTRATION

Following entities / funds are eligible to get registered as FII:

• Pension Funds

• Mutual Funds

• Investment Trust

• Insurance or reinsurance companies

• Investment Trusts

• Banks

• Endowments

• University Funds

• Foundations

• Charitable Trusts or Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also
eligible to be registered as FIIs:

• Asset Management Companies

• Institutional Portfolio Managers

• Trustees

• Power of Attorney Holders.

 FIIs can invest in the stocks and debentures of the Indian companies. In order to
invest in the primary and secondary capital markets in India, they have to venture through
the portfolio investment scheme (PIS). According to RBI regulations, the ceiling for
overall investment of FIIs is 24% of the paid up capital of the Indian company. The limit
is 20% of the paid up capital in the case of public sector banks. However, if the board and
the general body approve and pass a special resolutions, then the ceiling of 24% for FII
investment can be raised up to sectoral cap for that particular segment. In fact, recently
SEBI allowed FIIs to invest in unlisted exchanges as well, which means both BSE and
NSE (the unlisted bourses) can now allot shares to FIIs also.

Parameters on which SEBI decides FII applicants’ eligibility

As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are
required to fulfill the following conditions to qualify for grant of registration:

• Applicant should have track record, professional competence, financial

soundness, experience, general reputation of fairness and integrity.

• The applicant should be regulated by an appropriate foreign regulatory authority

in the same capacity/category where registration is sought from SEBI. Registration with
authorities, which are responsible for incorporation, is not adequate to qualify as Foreign
Institutional Investor.

• The applicant is required to have the permission under the provisions of the
Foreign Exchange Management Act, 1999 from the Reserve Bank of India.

• Applicant must be legally permitted to invest in securities outside the country or

its in-corporation / establishment.

• The applicant must be a "fit and proper" person.

• The applicant has to appoint a local custodian and enter into an agreement with
the custodian. Besides it also has to appoint a designated bank to route its transactions.

• Payment of registration fee of US $ 5,000.00

"Form A" as prescribed in SEBI (FII) Regulations, 1995 is to be filled before applying for
FII registration.
Supporting documents required are:

• Application in Form A duly signed by the authorized signatory of the applicant.

• Certified copy of the relevant clauses or articles of the Memorandum and Articles
of Association or the agreement authorizing the applicant to invest on behalf of its clients
• Audited financial statements and annual reports for the last one year , provided
that the period covered shall not be less than twelve months.

• A declaration by the applicant with registration number and other particulars in

support of its registration or regulation by a Securities Commission or Self Regulatory
Organisation or any other appropriate regulatory authority with whom the applicant is
registered in its home country.

• A declaration by the applicant that it has entered into a custodian agreement with
a domestic custodian together with particulatrs of the domestic custodian.

• A signed declaration statement that appears at the end of the Form.

• Declaration regarding fit & proper entity.

The fee for registration as FII is US $ 5,000. The mode of payment is Demand Draft in
favour of "Securities and Exchange Board of India" payable at New York”.

SEBI generally takes 7 working days in granting FII registration. However, in

cases where the information furnished by the applicants is incomplete, seven days shall
be counted from the days when all necessary information sought, reaches SEBI.
In cases where the applicant is bank and subsidiary of a bank, SEBI seeks
comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be
counted from the day no objection is received from RBI.
The FII registration is valid for 5 years. After expiry of 5 years, the registration
needs to be renewed.
Same as initial registration, Along with "Form A" and all the relevant documents,
the applicants are required to fill in additional form (Annexure 1) while applying for
renewal. US $ 5,000 needs to be paid for renewal of FII registration.
The application for renewal should be submitted three months before expiry of the
FII registration. 170 % debt FIIs are debt dedicated FIIs which invest in debt securities
only. The procedure for registration of FII/sub-account, under 170% debt route is similar
to that of normal funds besides a clear statement by the applicant that it wishes to be
registered as FII/sub-account under 170% debt route.
The FII registration application should be sent to:

Securities and Exchange Board of India

Division of FII & Custodian

Mittal Court "B" Wing, First Floor

224, Nariman Point

Mumbai 400 021

India.

SUB-ACCOUNT REGISTRATION

 Institution or funds or portfolios established outside India, whether incorporated

 or not.

 Proprietary fund of FII.

 Foreign Corporates

 Foreign Individuals.

The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-
account are required to sign the Sub-account application form.
"Annexure B" to "Form A" (FII application form) needs to be filled when
applying for sub-account registration. No document is needed to be sent with annexure B.
The fee for sub-account registration is US$ 1,000. The fee is to be submitted at the time
of submitting the application. The mode of payment is Demand Draft in the name of
"Securities and Exchange Board of India" payable at New York. SEBI generally takes
three working days in granting FII registration. However, in cases where the information
furnished by the applicants is incomplete, three days shall be counted from the days when
all necessary information sought, reaches SEBI. The validity of sub-account registration
is co-terminus with the FII registration under which it is registered. The process of
renewal of sub-account is same as initial registration. Renewal fee in this case is US $
1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.
POST-REGISTRATION PROCESSES:

If a registered FII/sub-account undergoes name change, then the FII need to

promptly inform SEBI about the change. It should also mention the reasons for the name
change and give an undertaking that there has been no change in beneficiary ownership.
In case of name change of FII, the request should be accompanied with documents
from home regulator and registrar of the company evidencing approval of name change,
and the original FII registration certificate issued by SEBI should be sent back for
necessary amendment.

Procedure for transferring a sub-account from one FII to another:

The FII to whom the Sub-account is proposed to be transferred has to send a

request along with a declaration that it is authorized to invest on behalf of the Sub-
account. The transferor FII should also submit a No-objection certificate.
The FII should send a request, along with no-objection certificate from existing domestic
custodian, for change in domestic custodian.
The FII would be required to send a request for cancellation of its registration or
registration of its Sub-account/s clearly mentioning the name and registration number of
the entity. The FII should ensure that it / Sub-account has nil cash / securities holdings.
Procedure for change of local custodian:
In case of change of the local custodian of the FII / sub-account, the change
should be intimated to SEBI by the FII. On receipt of no objection from the existing
custodian and acceptance from the proposed custodian, the change of custodian would be
approved - by SEBI.
Procedure for registration as FII/sub account under 170% debt route:
The procedure for registration of FII/sub account under 170% debt route is similar
to that of normal funds besides a clear statement by the applicant that it wishes to be
registered as FII/sub account under 170% debt route. However, Government of India
allocates the overall investment limit for 170% debt funds annually. The grant of
investment limit for individual 170% debt funds is within this overall limit. The funds
have to seek further investment limit in case the limit allotted to them is exhausted and
they wish to invest further.
A Foreign Institutional Investor having an account with one custodian can open
accounts with different custodians for its different sub-accounts. However, one sub-
account cannot be custodial with more than one custodian.
Procedure if an existing sub-account wants to get registered as a Foreign Institutional
Investor:
In case if a registered sub-account wishes to get itself registered as a Foreign
Institutional Investor, then it will have to apply in Form A to SEBI for the same and has
to satisfy all the eligibility criteria norms mentioned in SEBI (Foreign Institutional
Investor) Regulations, 1995. It should also submit a letter from the old FII indicating its
'No-objection' to such registration.
Procedure for renewal of FII/Sub-Account registration:
They have to apply before 3 months of the expiry of registration in Form A.
Circular No FITTC/CUST/16/2000 dated September 21, 2000 may be referred.
If the FII does not renew its/sub-account’s registration:
The registration of the FII / Sub-account would get expired at due date and it
would not be allowed to trade in Indian securities markets. If it is not interested in
renewal but has certain residual assets, it can apply for disinvestment in terms of Circular
No. FITTC/CUST/12/2001 dated June 11, 2001 and abides by the guidelines specified in
this regard.

Scope of Investments under the Portfolio Investment Scheme.

FIIs, under the Portfolio Investment Scheme, are permitted to make both primary
and secondary investments in the Indian capital markets. Unlike an investor which relies
solely on FDI regulations, a foreign investor which registers as a FII would be allowed to
buy and sell securities over Indian stock exchanges. In addition, FIIs are entitled to effect
transactions in a broader category of securities than an investor relying on FDI
regulations alone. FIIs are permitted to purchase equity securities (both listed and
unlisted), units of schemes floated by the Unit Trust of India and other domestic
municipal funds, warrants, debentures, bonds, governmental securities and derivative
instruments which are traded on a recognized stock exchange. There is no limit on the
amount that FIIs may invest in the Indian market, and no lock-up periods apply to
investments made by FIIs.

Exchange Controls

FIIs are required to open up one or more bank accounts with certain designated
banks and must also appoint a domestic custodian for custody of investment made by the
FII. Through the designated accounts, FIIs are authorized to freely transfer funds from
foreign currency accounts to Rupee accounts and vice versa; make Rupee denominated
investments in Indian companies; freely transfer after-tax proceeds from Rupee accounts
to foreign currency accounts, and repatriate capital, capital gain, dividends interest
income and other gains, subject to deduction for applicable withholding taxes. So long as
FIIs execute purchases and sales on a recognized Indian stock exchange, they are not
required to obtain transaction specific approval from the Reserve Bank. FIIs are also
entitled to effect transactions using their own proprietary funds, or the funds of their sub
accounts.
Investment Restrictions.

Certain limitations apply to investments by FIIs into India. First, FIIs’ and their
sub- accounts’ investment in an Indian company can not exceed ten percent (17%) of the
total issued share capital of the Indian company (five percent if the subaccount is a
foreign corporation or individual). In addition, the aggregate investment of all FIIs in an
Indian company may not exceed twenty four percent (24%) of its total issued share
capital, without the express approval of its board of directors and shareholders. Even with
board of director and shareholder approval, the same sectoral limits which apply to
foreign direct investment would continue to apply. FIIs may register with SEBI as a debt
fund or an equity fund. FIIs which are registered as equity funds, are required to invest at
least seventy percent (70%) of their funds in equity and equity-related securities. A FII
registered as a debt fund, on the other hand, must invest one hundred percent (170%) of
its funds in debt instruments. Foreign corporations and individuals are not eligible
subaccounts of a FII that is registered as a debt fund. FIIs are not permitted to engage in
short selling, other than in respect of derivative securities traded over a recognized
exchange, and must effect transactions through a registered stock broker. Sector
investment prohibitions and caps which apply to foreign direct investment also apply to
investments by FIIs, and FII investments must also comply with the pricing requirements
applicable to foreign direct investment. In addition, FIIs are not permitted to invest
in print media.

Trend of FIIs with the help of economic figures:

• In 2011, FII investments crossed $9 billion, the highest in the history of Indian
capital markets.

• The total net investment for the year up to December 29 stood at US$9,142
million while foreign investors pumped in about US$2,113 million in December.

• Korea and Taiwan have always been the biggest recipients of FII money. It was
only in 2011 that India managed to receive the second highest FII inflow at over $8.5bn.

• In 2012 FIIs invested more in Indian equities than in Korean or Taiwanese

equities.

• On 9th March 2016, India's exceptional growth story and its booming economy
have made the country a favourite destination with foreign institutional investors (FIIs). It
has continued to attract investment despite the Satyam non-governance issue and the
global economic contagion impact on Indian markets.

• According to Mr Gautam Chand, CEO of Instanex, said FIIs are the largest
institutional investors in India with holdings valued at over US$ 751.14 billion as on
December 31, 2015.
• They are also the most successful portfolio investors in India with 172 per cent
appreciation since September 30, 2010.

• As per SEBI, number of registered FIIs stood at 1626 and number of registered
sub-accounts stood at 4972 as on March 17, 2016.
Future Prospects of Foreign Institutional Investments:

• Sustaining the growth momentum and achieving an annual average growth of 9-

17% in the next five years.

• Simplifying procedures and relaxing entry barriers for business activities and
Providing investor friendly laws and tax system.

• Checking the growth of population; India is the second highest populated country
in the world after China. However in terms of density India exceeds China, as India's land
area is almost half of China's total land. Due to a high population growth, GNI per capita
remains very poor. It was only $ 2880 in 2010 (World Bank figures).

• Boosting agricultural growth through diversification and development of agro

processing.

• Expanding industry fast, by at least 17% per year to integrate not only the surplus
labour in agriculture but also the unprecedented number of women and teenagers joining
the labour force every year.

• Developing world-class infrastructure for sustaining growth in all the sectors

of the economy

• Allowing foreign investment in more areas.

• Effecting fiscal consolidation and eliminating the revenue deficit through revenue
enhancement and expenditure management.

• Global corporations are responsible for global warming, the depletion of natural
resources, and the production of harmful chemicals and the destruction of organic
agriculture.

The government should reduce its budget deficit through proper pricing
mechanisms and better direction of subsidies. It should develop infrastructure with what
Finance Minister P Chidambaram International Research Journal of Finance and
Economics - Issue 5 (2013) 171 of India called “ruthless efficiency” and reduce
bureaucracy by streamlining government procedures to make them more transparent and
effective.
 Empowering the population through universal education and health care, India
must maximize the benefits of its youthful demographics and turn itself into the
knowledge hub of the world through the application of information and communications
technology (ICT) in all aspects of Indian life although, the government is committed to
furthering economic reforms and developing basic infrastructure to improve lives of the
rural poor and boost economic performance. Government had reduced its controls on
foreign trade and investment in some areas and has indicated more liberalization in civil
aviation, telecom and insurance sector in the future.

Who all can get registered as FIIs

There is a long list of entities that are eligible to get registered as FIIs such as
pension funds, mutual funds, insurance companies, investment trusts, banks, university
funds, endowments, foundations, sovereign wealth funds, hedge funds and charitable
trusts. In fact, asset management companies, investment managers, advisors or
institutional portfolio managers set up and/or owned by NRIs are also eligible to be
registered as FIIs.
The nodal point for FII registrations is SEBI and hence all FIIs must register
themselves with SEBI and should also comply with the exchange control regulation of
the central bank. Apart from being allowed to invest in securities in primary and
secondary markets FIIs can also invest in mutual funds. Dated government securities,
derivatives traded on a recognized stock exchange and commercial papers.

Investment Ceilings for FIIs and its Regulations:

Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and persons

of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital
markets in India through the portfolio investment scheme (PIS). Under this scheme,
FIIs/NRIs can acquire shares/debentures of Indian companies through the stock
exchanges in India.

The ceiling for overall investment for FIIs is 24% of the paid up capital of the
Indian company and 17% for NRIs/PSOs. The limit is 20% of the paid up capital in the
case of public sector banks, including the State Bank of India.

The ceiling of 24% for FII investment can be raised up to sectoral cap/statutory
ceiling, subject to the approval of the board and the general body for the company
passing a special resolution to that effect. And the ceiling of 17% for NRIs/PIOs can be
raised to 24% subject to the approval of the general body of the company passing a
resolution to that effect.
 The ceiling for FIIs is independent of the ceiling of 17/24 percent of NRIs/PIOs.
The equity shares and convertible debentures of the companies with in the prescribed
ceilings are available for purchase under PIS subject to:

The total purchase of all NRIs/PIOs both, on repatriation and non-repatriation

basis, being with in an overall ceiling limit of (a) 24 percent of the company’s total paid
up equity capital and (b) 24 percent of the total paid up value of each series of convertible
debenture; and

The investment made on repatriation basis by any single NRI/PIO in the equity
shares and convertible debentures not exceeding five percent of the paid up equity capital
of the company of five percent of the total paid up value of each series of convertible
debentures issued by the company.

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in

Indian companies on a daily basis. For effective monitoring of foreign investment ceiling
limits, the Reserve Bank has fixed cut-off points that are two percentage points lower
than the actual ceilings. The cut-off point, for instance, is fixed at 8 percent of companies
in which NRIs/PIOs can invest up to 17 percent of the company’s paid up capital. The
cut-off limit for companies with 24 percent ceiling is 22 percent and for companies with
30 percent ceiling, is 28 percent and so on. Similarly, the cut-off limit for public sector
banks (including state Bank of India) is 18 percent.

Once the aggregate net purchases of equity shares of the company by

FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve
Bank cautions all designated bank branches so as not to purchase any more equity shares
of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the
Reserve Bank. The link offices are then required to intimate the Reserve Bank about the
total number and value of equity shares/convertible debentures of the company they
propose to buy on behalf of FIIs/NRIs/PIOs.

On receipt of such proposals, the Reserve Bank gives clearances on a first-come-

first served basis till such investments in companies reach 17/24/30/40/49 percent limit
the sectoral caps/statutory ceiling as applicable. On reaching the aggregate ceiling limit,
the Reserve Bank advises all designated bank branches to stop purchases on behalf of
their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the
‘caution’ and the ‘stop purchase’ in these companies through a press release.
Few Examples of companies in which FII investment has been
made at different investment ceilings:

Companies where NRI investment has already reached 17% and no further
purchases can be allowed

1. DSQ Biotech Ltd

2. Global Trust Bank Ltd.

3. Madras Alluminium Co. Ltd

4. SPL Ltd

5. Seirra Optima Ltd

6. The Baroda Rayon Corp

7. Tai Industries Ltd.

Companies where NRI investment has reached 8% and further purchases are allowed
only with prior approval RBI

1. Astra IDL Ltd.

2. M/s. Codura Exports Ltd.

3. IDL Industries Ltd.

4. Nexus Software Ltd.

Dalmia Cement (Bharat) Ltd.

5.
Companies in which NRIs/PIOs investment is allowed up to 24% of their Paid-up
Capital

1 Alembic Chemical Works Co. Ltd

2 Amar Investments Ltd, Calcutta.

3 Anglo-India Jute Mills Co.Ltd.

4 Arvind Mills, Ahmedabad

5 Ashima Syntex Ltd, Ahmedabad

6 Ashoka Viniyoga Ltd.

7 Bharat Nidhi Ltd.

8 BLB Shares & Financial Services Ltd

9 BPL Ltd

17 Burr Brown (India) Ltd

11 Camac Commercial Company Ltd.

12 Ceenik Exports (India) Ltd.

13 Cifco Finance Ltd. Mumbai

14 Classic Financial Services & Enterprises Ltd, Calcutta

15 CPPL Ltd,(Reliance Ind. Infrastructure Ltd), Mumbai

16 CRISIL

17 DCM Shriram Consolidated Ltd.

18 Dharani Sugars & Chemicals Ltd.

19 Dolphin Offshore Enterprises (I) Ltd

20 Essar Oil Ltd.

35 Jagatjit Industries Ltd, New Delhi

36 Jai Parabolic Springs Ltd, New Delhi

37 Jaysynth Dyechem Ltd.

38 Jindal Strips Ltd.

39 Jindal Iron & Steel Co.Ltd.

40 JJ Spectrum Silk Ltd

41 Kartjikeya Paper & Boards Ltd.

42 Lakhani India Ltd.

43 Matsushita Television And Audio India Ltd

44 M.P.Agro Fertilisers Ltd. Bhopal

45 Macleod Russel (I) Ltd.

46 Mazda Enterprises Ltd.Mumbai

47 Media Video Ltd

48 Multimetals Ltd, Mumbai

49 National Steel Industries Ltd

50 Nicholas Laboratories India Ltd, Mumbai

51 O.P. Electronics Ltd, Mumbai

52 Oriental Housing Development Finance Corp Ltd

53 Padmini Technologies Ltd.

54 Panacea Biotech Ltd.

55 Pearl Polymers Ltd, New Delhi

56 Piramal Healthcare Ltd.

57 PNB Finance & Industries Ltd

58 Rajath Leasing & Finance Ltd.

59 Rama Petrochemicals Ltd.

Rama Phosphates Ltd.
60

1) Companies in which FII Investment is allowed up till 30% of their

paid up capital :-

1. Aptech Ltd.

2. Asian Paints (India) Ltd

3. Capital Trust Ltd

4. Container Corporation of India

5. Ferro Alloys Corporation Ltd

6. Garware Polyester Ltd.

7. GIVO Ltd (formerly KB&T Ltd)

8. Gujarat Ambuja Cements Ltd.

9. Infotech Enterprises Ltd.

17. Mastek Ltd.

11. Orchid Chemicals and Pharmaceuticals Ltd

12. Pentasoft Technologies Ltd (Pentafour Communications Ltd.)

13. Polyplex Corporation Ltd

14. Ranbaxy Laboratories Ltd
Software Solutions Integrated Ltd
15.

16. Sonata Software Ltd

The Credit Rating Information Services of India Ltd.
17.

18. The Paper Products Ltd

19. Vikas WSP Ltd.

2) Companies in which FII Investment is allowed up to 40% of their

paid up capial :-

1. Balaji Telefilms Ltd.

2. M/s. Burr Brown (India) Ltd.

3. M/s. Elbee Services Ltd.

4. Hero Honda Motors Ltd.

5. Jyoti Structures Ltd.

6. Maars Software International Ltd.

7. Padmini Technologies Ltd.

8. Pentamedia Graphics Ltd.

9. Thiru Arooran Sugars Ltd.

17. UTV Software Ltd.

11. VisualSoft Technologies Ltd.

12. M/s. Silverline Technologies Ltd.

13. Ways India Ltd

3) Companies in which FII Investment is allowed up to 49% of their

paid up capital :-

1. Blue Dart Express Ltd

2. CRISIL

3. HDFC Bank Ltd

4. Hindustan Lever Ltd

5. Himachal Futuristic Communications Ltd

6. Infosys Technologies Ltd.

7. NIIT Ltd.

8. Dr. Reddy's Laboratories

9. Panacea Biotec Ltd.

17. Reliance Industries Ltd.

11. Reliance Petroleum Ltd.

12. Sofia Software Ltd

13. Sun Pharmaceutical Industries Ltd

14. United Breweries Ltd.

15. United Breweries (Holdings) Ltd.

16. Zee Telefilms Ltd.

Companies in which NRI/FII Investment is allowed upto 49% of their paid up capital

1. ICICI Bank Ltd.

Companies in which FII Investment is allowed upto sectoral cap/statutory ceiling of their
paid up capital

1. GTL Ltd. - (74%)

2. Housing Development Finance Corporation Ltd. - (74%)

3. Infosys Technologies Ltd. - (170%)

4. Pentamedia Graphics Ltd. - (170%)

5. Pentasoft Technologies Ltd. - (170%)

6. Mascon Global Ltd. - (170%)

7. Punjab Tractors Ltd. - (64%)

8. Satyam Computer Services Ltd - (60%)

Companies where 22% FII investment limit has been reached and further purchases are
allowed with prior approval of RBI

1. ACC Ltd.

2. Digital Global Soft Ltd.

Financial instruments are available for FII investments:

* Securities in primary and secondary markets including shares, debentures and

warrants of companies, unlisted, listed or to be listed on a recognized stock
exchange in India.

* Units of mutual funds;

* Dated Government Securities;
* Derivatives traded on a recognized stock exchange;
* Commercial papers.

FIIs importance for Indian Markets:-

FIIs are among the major sources of liquidity for the Indian markets. If FIIs are
investing huge amounts in the Indian stock exchanges then it reflects their high
confidence and a healthy investor sentiment for our markets. But with the current global
financial turmoil and a liquidity and credit freeze in the international markets, FIIs have
become net sellers (on a day to day basis). The entry or FIIs in India has brought mixed
consequences for our markets, on one hand they have improved the breadth and depth of
Indian markets and on the other hand they have also become the major sources of
speculation in testing times like these.

Foreign Institutional Investment in India

India opened its stock market to foreign investors in September 1992 and has,
since 1993, received portfolio investment from foreigners in the from of foreign
institutional investment in equities. This has become one of the main channels of FII in
India for foreigners. In order to trade in Indian equity market foreign corporations need to
register with SEBI as Foreign Institutional Investor (FII). India allows only authorized
foreign investors who are referred to as FII’s which include pension funds, investment
trusts, asset management companies, university funds, endowments, foundation,
charitable interests and charitable societies that have a track record of five years and
which are registered with a statutory authority in their own country of incorporation or
settlement. It is possible for foreigners to trade in Indian securities without registering as
an FII but such cases require approval from the RBI or the Foreign Investment Promotion
Board. FIIs generally concentrate in secondary market. The total amount of foreign
institutional investment in India has accumulated to formidable sum of over US $
11464.64 Million by the end of November 2002.

Data Description and Methodology for Variable Construction

To test the hypothesis entailed in the last section, we require data for returns, risk
and inflation in domestic and foreign economy, and data on FII flowing into domestic
economy (India). US is chosen as the foreign country to model FII inflow in India,
because US is our trade partner and accounts for the largest proportion of FII following
to India. (42 percent)3. Hence US could safely be used as proxy for rest of the world, to
Study prices, (Return = logPt-logPt12). Composite BSE Sensex is used for Indian stock
prices and S& P 500 is used for US stock prices. This study uses Standard & Poor’s 500
Index because it is usually considered as the benchmark for U.S equity performance. It
represents 70% of all U.S. publicly traded companies. Part of the index’s popularity is
due to its close association with the largest mutual fund in the world, the Vanguard 500
Index Fund, and Spiders, the first exchange traded fund. The listed companies are highly
diverse, spanning every relevant portion of the U.S. economy. The S&P 500 index also
tends to be the default when people discuss “index funds,” since index funds based on
other indexes were not widely available until recently.

To capture risk, monthly standard deviations are computed from daily returns on
composite BSE Sensex and S&P 500. We Would use ex ante risk rather than realized risk,
because realized risk represents a combination of ex ante risk and unexpected risk. While
FII may exhibit a negative relationship with predicted risk, its relationship with
unanticipated standard deviation could be positive. Since the relative importance of ex
ante risk and unexpected risk could vary overtime, one may get obscure relationship
between FII and realized risk. Wholesale Price Index is used to calculate year-on-year
inflation in India and Producer Price index is used to calculated inflation in US.
Monthly data has been used from January 1994 to November 2002. First year (1993) is
considered as learning period for foreign investors and hence an outlier, so it is not
included in the estimate.

What is the Indian Rupee (INR)?

 The Indian Rupee is the original official currency of India. The English translation
of “Rupee” is “Silver,” and the name exists because it was previously a silver coin. This
very fact had severe consequences in the 19th century, when the strongest economies in
the world were on the gold standard. The discovery of vast quantities of silver in the U.S.
and various European colonies resulted in a decline in the relative value of silver to gold.
Suddenly, the standard currency of Indian could not buy as much from the outside world.
Such circumstances led to what is now referred to as “the fall of the Rupee.”

During the period 1950-1951 until mid-December 1973, India followed an

exchange rate regime with the Rupee linked to the pound sterling, except for the
devaluations in 1966 and 1971. When the pound sterling floated on June 23,1972 the
Rupees link to the British unit was maintained-thus, paralleling the Pound’s depreciation
and de facto devaluation.

In 1975, the Rupee’s ties to the Pound Sterling were disengaged. India established
a float exchange regime, with the Rupee’s effective rate placed on a controlled, floating
basis and linked to a ‘’basket of currencies” of India’s major trading partners. More
recently, the Indian Rupee has been depreciating in step formation, but roughly in line
with the fall in its Purchasing Power Parity since the early 1980s. While the PPP was 15
around 1982, the actual exchange rate was 9.30 per US dollar. After the devaluation, the
Rupee underwent the change from a controlled regime to a “Managed” or “Dirty” float
regime, where the market supposedly determines the exchange rate. In mid 2012, the
actual rate was near 43.60.
Latest Symbol of Indian National Rupee

D. Udaya Kumar
Research Scholar of Indian Rupee symbol
IIT Bombay

What does it look like?

 Old and New Indian Coins

Political Structure

India is a federal republic with a parliamentary from of government. The

Parliament consists of a bicameral national legislature, with the Rajya Sabha (Council of
States) containing 250 members and the Lok Sabha (House of the People) with 545
members. India is a Union of 28 States and seven centrally administered union territory

Prominent Figures

The President of India is SMT. PRATIBHA DEVISINGH PATAL. The Prime

Minister of India is Manmohan Singh, who assumed the position on may 22, 2011. The
Reserve Bank of India is the central bank of India, and it controls the issurance of
currency throughout the nation.

Unique Characteristics

The INR is being pushed by India’s strong growth rate and speculation that there
may be an imminent adjustment to China’s FX regime. In addition, India’s trade deficit
has experienced record highs in 2012 and 2013.
 Throughout 2012, the Reserve Bank of India’s has seemed to be apathetic to the
overvaluation of the Rupee. This apathy is letting devices work toward their ends, as an
overvalued Rupee is helping to maintain a balance between inflation and growth. An
overvalued currency in an environment of high imported prices, can moderate
inflationary pressures. Once the inflation rate returns to more tolerable levels, the
overvaluation concerns will once again get back into focus.

Key Economic Factors

Consumer Price Index :

The CPI is used to measure inflation by computing changes in prices of products

consumed by households. In India, prices are susceptible to rapid increases. Consumers
are not immune to these price hikes, as wholesalers have a strong ability to pass the raise
in price raise in price along.

Gross Domestic Product :

The Central Statistical Office of India recently started using data reporting
standards of the International Monetary Fund (IMF), reporting the GDP in early quarters
of the late 1990s. The GDP measures the total production and consumption of goods and
services in India. It is necessary to look at changes in real GDP growth in India’s primary
industries, which include agriculture, manufacturing, trade, hotels, transport and
communication.

Industrial Production :

The index of Industrial Production (IIP) is a monthly composite of the value of

industrial production in various sectors of industrial sectors of the economy. The current
IIP includes the mining, manufacturing and electricity industries, each with different
weights. The mining and utility industries in India are especially worth watch in.
 INDIAN FOREIGN EXCHANGE MARKET

A HISTORICAL PERSPECTIVE

Early Stages : (1947-1977)

The evolution of India’s foreign exchange market may be viewed in line with the
shifts in India’s exchange rate policies over the last few decades from a par value system
to a basket-peg and further to a managed float exchange rate system. During the period
from 1947 to 1971, India followed the per value system of exchange rate. Initially the
rupee’s external per value was fixed at 4.15 grains of fine gold. The Reserve Bank
maintained the per value of the rupee within the permitted margin of =1 percent using
pound sterling as the intervention currency. Since the sterling dollar exchange rate was
kept stable by the US monetary authority, the exchange rates of rupee in terms of gold as
well as the dollar and other currencies were indirectly kept stable. The devaluation of
rupee in September 1949 and June 1966 in terms of gold resulted in the reduction of the
per value or rupee in terms of gold to 2.88 and 1.83 grains of fine gold, respectively. The
exchange rate of the rupee remained unchanged between 1966 and 1971.

Given the fixed exchanged regime during this period, the foreign exchange
market for all practical purpose was defunct. Bank were required to undertake only cover
operations and maintain a ‘square’ or ‘near square’ position at all times. The objective of
exchange controls was primarily to regulate the demand for foreign exchange for various
purposes, within the limit set by the available supply. The Foreign Exchange Regulation
Act initially enacted in 1947 was placed on a permanent basis in 1957. In terms of the
provisions of the Act, the Reserve Bank, and in certain cases, the central Government
controlled and regulated the dealings in foreign exchange payments outside India, export
and import of currency notes and bullion, transfers of securities between residents and
non-residents, acquisition of foreign securities, etc.

With the breakdown of the Bretton Woods System in 1971 and the floatation of
major currencies, the conduct of exchange rate policy posed a serious challenge to all
central banks world wide as currency fluctuations opened up tremendous opportunities
for market players to trade in currencies in a borderless market. In December 1971, the
rupee was linked with pound sterling. Since sterling was fixed in terms of US dollar
under the Smithsonian Agreement of 1971, the rupee also remained stable against dollar.
In order to overcome the weaknesses associated with a single currency peg and to ensure
stability of the exchange rate, the rupee, with effect from September 1975, was pegged to
a basket of currencies. The currency selection and weights assigned were left to the
discretion of the Reserve Bank. The currencies included in the basket as well as their
relative weights were kept confidential in order to discourage speculation. It was around
this time that banks in India became interested in trading in foreign exchange.

Formative Period : (1978 – 1992)

The impetus to trading in the foreign exchange market in India came in 1978
when banks in India were allowed by the Reserve Bank to undertake intra-day trading in
foreign exchange and were required to comply with the stipulation of maintaining
‘square’ or ‘near square’ position only at the close of business hours each day. The extent
of position which could be left uncovered overnight (the open position) as well as the
limits up to which dealers could trade during the day were to be decided by the
management of banks. The exchange rate of the rupee during this period was officially
determined by the Reserve Bank of its buying and selling rates to the Authorized Dealers
(Ads) for undertaking merchant transactions. The spread between the buying and the
selling rates was 0.5 percent and the market began to trade actively within this range. Ads
were also permitted to trade in cross currencies (one convertible foreign currency versus
another). However, no ‘position’ in this regard could originate in overseas markets.

As opportunities to make profits began to emerge, major banks in India started

quoting two-way prices against the rupee as well as in cross currencies and, gradually,
trading volumes began to increase. This led to the adoption of widely different practices
(some of them being irregular) and the need was felt for a comprehensive set of
guidelines for operation of banks engaged in foreign exchange business. Accordingly, the
‘Guidelines for Internal Control over Foreign Exchange Business,’ were framed of
adoption by the bank in 1981. The foreign exchange market in India till the early 1990s,
however, remained highly regulated with restrictions on external transactions, barriers to
entry, low liquidity and high transaction costs. The exchanges rate during this period was
managed mainly for facilitating India’s imports. The strict control on foreign exchange
transactions through the Foreign Exchange Regulations Act (FERA) had resulted in one
of the largest and most efficient parallel markets for foreign exchange in the world, i.e.,
the hawala (unofficial) market.

By the late 1980s and the early 1990s, it was recognized that both macroeconomic
policy and structural factors had contributed to balance of payments difficulties.
Devaluation by India’s competitors had aggravated the situation. Although exports had
recorded a higher growth during the second half of the 1980s (from about 4.3 percent of
GDP in 1987-88 to about 5.8 percent of GDP in 1990-91), trade imbalances persisted at
around 3 percent of GDP. This combined with a precipitous fall in invisible receipt in the
form of private remittances, travel and tourism earnings in the year 1990-91 led to further
widening of current account deficit. The weaknesses in the external sector were
accentuated by the Gulf crisis of 1990-91. As a result, the current account deficit widened
to 3.2 percent of GDP 1990-91 and the capital flows also dried up necessitating the
adoption of exceptional corrective steps. It was against this backdrop that India embarked
on stabilization and structural reforms in the early 1990s.

Post-Reform Period : 1992 onwards

This phase was marked by wide ranging reform measures aimed at widening and
deepening the foreign exchange market and liberalization of exchange control regimes. A
credible macroeconomic, structural and stabilization programme encompassing trade,
industry, foreign investment, exchange rate, public finance and the financial sector was
put in place creating an environment conducive for the expansion of trade and
investment. It was recognized that trade policies, exchange rate policies and industrial
policies should from part of an integrated policy framework to improve the overall
productivity, competitiveness and efficiency of the economic system, in general and the
external sector, in particular.

As a stabilsation measure, a two step downward exchange rate adjustment by 9

percent and 11 percent between July 1and 3, 1991 was resorted to counter the massive
drawdown in the foreign exchange reserves, to instill confidence among investors and to
improve domestic competitiveness. A two-step adjustment of exchange rate in July 1991
effectively brought to close the regime of a pegged exchange rate. After the Gulf crisis in
1990-91, the broad framework for reforms in the external sector was laid out in the
Report of the High Level Committee on Balance of Payments (Chairman: Dr. C.
Rangarajan). Following the recommendations of the Committee to move towards the
market-determined exchange rate, the liberalized Exchange Rate Management System
(LERMS) was put in place in March 1992 initially involving a dual exchange rate
system. Under the LERMS, all foreign exchange receipts on current account transactions
(exports, remittances, etc.) were required to be surrendered to the Authorized Dealers
(Ads) in full. The rate of exchange for conversion of 60 percent of the proceeds of these
transactions was the market rate quoted by the ADs, while the remaining 40 percent of
the proceeds were converted at the Reserve Bank’s official rate. The ADs, in turn, were
required to surrender these 40 percent of their purchase of foreign currencies to the
Reserve Bank. They were free to retain the balance 60 percent of foreign exchange for
selling in the free market for permissible transactions. The LERMS was essentially a
transitional mechanism and a downward adjustment in the official exchange rate took
place in early December 1992 and ultimate convergence of the dual rates was made
effective from March 1, 1993, leading to the introduction of a market-determined
exchange rate regime.

The dual exchange rate system was replaced by a unified exchange rate system in
March 1993, whereby all foreign exchange receipts could be converted at market
determined exchange rates. On unification of the exchange rates, the nominal exchange
rate of the rupee against both the US dollar as also against a basket of currencies got
adjusted lower, which almost nullified the impact of the previous inflation differential.
The restrictions on a number of other current account transactions were relaxed. The
unification of the exchange rate of the Indian rupee was an important step towards current
account convertibility, which was finally achieved in August 1994, when India accepted
obligations under Article VIII of the Articles of Agreement of the IMF

With the rupee becoming fully convertible on all current account transactions, the
risk-bearing capacity of banks increased and foreign exchange trading volumes started
rising. This was supplemented by wide-ranging reforms undertaken by the Reserve Bank
in conjunction with the Government to remove market distortions and deepen the foreign
exchange market. The process has been marked by ‘gradualism’ with measures being
undertaken after extensive consultations with experts and market participants. The reform
phase began with the Sodhani Committee (1994) which in its report submitted in 1995
made several recommendations to relax the regulations with a view to vitalizing the
foreign exchange market.

Recommendations of the Expert Group on Foreign Exchange Markets

In India

The Expert Group on Foreign Exchange Markets in India (Chairman : Shri O.P.
Sodhani), which submitted its Report in 1995, identified various regulations inhibiting
the growth of the market. The Group recommended that the corporate may be
recommended that banks should be permitted to fix their own exchange position limits
such as intra-day and overnight limits, subject to ensuring that the capital is provided
marked to the extent of 5 percent of this limit based on internationally accepted
guidelines. The Group also favored fixation of Aggregate Gap Limit (AGL), which would
also include rupee transactions, by the managements of the banks based on capital risk
taking capacity, etc. It recommended that banks be allowed to initiate cross currency
positions abroad and to lend or borrow short-term funds up to six months, subject to a
specified ceiling. Another important suggestion related to allowing exporters to retain 170
percent of their export earnings in any foreign currency with an Authorized Dealer (AD)
in India, subject to liquidation of outstanding advances against export bills. The Group
was also in favor of permitting ADs to determined the interest rates and maturity period
in respect of FCNR (B) deposits. It recommended selective intervention by the Reserve
Bank in the market so as to ensure greater orderliness in the market.

In addition, the Group recommended various other short-term and long-term

measures to activate and facilitate functioning of markets and promoted the development
of a vibrant derivative market. Short-term measures recommended included exemption of
domestic inter-bank borrowings from SLR/CRR requirements to facilitate development
of the term money market, cancellation and re-booking of currency options, permission to
offer lower cost option strategies such as the ‘range forward’ and ‘ratio range forward’
and permitting ADs to offer any derivative products on a fully covered basis which can be
freely used for their own asset liability management.

As part of long-term measures, the Group suggested that the Reserve Bank should
invite detailed proposals from banks for offering rupee-based derivatives, should refocus
exchange control regulation and guidelines on risks rather than on products and frame a
fresh set of guidelines for foreign exchange and derivatives risk management.
As regards accounting and disclosure standards, the main recommendations included
reviewing of policy procedures and transactions on an on-going basis by a risk control
team independent of dealing and settlement functions, ensuring fo uniform
documentation and market practices by the Foreign Exchange Dealers’ Association of
India (FEDAI) or any other body and development of accounting disclosure standard.
 Most of the recommendations of the Sodhani Committee relating to the
development of the foreign exchange market were implemented during the latter half of
the 1990s.

In addition several initiatives aimed at dismantling controls and providing and

enabling environment to all entities engaged in foreign exchange transactions have been
undertaken since the mid-1990s. The focus has been on developing the institutional
framework and increasing the instruments for effective functioning, enhancing
transparency and liberalizing the conduct of foreign exchange business so as to move
away from micro management of foreign exchange transactions to macro management of
foreign exchange flows (Box VI.3).

An Internal Technical Group on the Foreign Exchange Markets (2012) set up by

the Reserve Bank made various recommendations for further liberalization of the extant
regulations. Some of the recommendations such as freedom to cancel and rebook forward
contracts of any tenor, delegation of powers to ADs for grant of permission to corporates
to hedge their exposure to commodity price risk in the international commodity
exchanges/markets and extension of the trading hours of the inter-bank foreign exchange
market have since been implemented.

Along with these specific measures aimed at developing the foreign exchange
market, measures towards liberalizing the capital account were also implemented during
the last decade, guided to a large extent since 1997 by the Report of the Committee on
Capital Account Convertibility (Chairman : Shri S.S. Tarapore). Various reform measures
since the early 1990s have had a profound effect on the market structure, depth, liquidity
and efficiency of the Indian foreign exchange market as detailed in the following section.

Measures Initiated to Develop the Foreign Exchange Market in India

Institutional Framework.

The Foreign Exchange Regulation Act (FERA),1973 was replaced by the market
friendly Foreign Exchange Management Act (FEMA), 1999. The Reserve Bank delegated
powers to authorized dealers (ADs) to release foreign exchange for a variety of purposes.

* In pursuance of the Siobhan Committee’s recommendations, the Clearing

Corporation of India Limited (CCIL) was set up in 2001.
* To further the participatory process in a more holistic manner by taking into
account all segments of the financial markets, the ambit of the Technical Advisory
Committee (TAC) on Money and Securities Markets set up by the Reserve Bank in 1999
was expanded in 2011 to include foreign exchange markets and the Committee was
rechristened as TAC on Money, Government Securities and Foreign Exchange Markets
Increase in Instruments in the Foreign Exchange Market.

* The rupee-foreign currency swap market was allowed

* Additional hedging instruments such as foreign currency-rupee options, cross-

currency options, interest rate swaps (IRS) and currency swaps, caps/collars and forward
rate agreements (FRAs) were intrduced.
 2.5 Introduction of Volatility

In finance, volatility most frequently refers to the standard deviation of the

continuously compounded returns of a financial instrument within a specific time
horizon. It is common for discussions to talk about the volatility of a security's price,
even while it is the returns' volatility that is being measured. It is used to quantify the risk
of the financial instrument over the specified time period.

Volatility as described here refers to the actual current volatility of a financial

instrument for a specified period (for example 30 days or 90 days). It is the volatility of a
financial instrument based on historical prices over the specified period with the last
observation the most recent price. This phrase is used particularly when it is wished to
distinguish between the actual current volatility of an instrument and

 actual historical volatility which refers to the volatility of a financial instrument

over a specified period but with the last observation on a date in the past
 actual future volatility which refers to the volatility of a financial instrument
over a specified period starting at the current time and ending at a future date
(normally the expiry date of an option)
 historical implied volatility which refers to the implied volatility observed from
historical prices of the financial instrument (normally options)
 current implied volatility which refers to the implied volatility observed from
current prices of the financial instrument
 future implied volatility which refers to the implied volatility observed from
future prices of the financial instrument

Volatility vs. Direction

Volatility does not measure the direction of price changes, merely their dispersion.
This is because when calculating standard deviation (or variance), all differences are
squared, so that negative and positive differences are combined into one quantity. Two
instruments with different volatilities may have the same expected return, but the
instrument with higher volatility will have larger swings in values over a given period of
time.

For example, a lower volatility stock may have an expected (average) return of 7%,
with annual volatility of 5%. This would indicate returns from approximately -3% to 17%
most of the time (19 times out of 20, or 95%). A higher volatility stock, with the same
expected return of 7% but with annual volatility of 20%, would indicate returns from
approximately -33% to 47% most of the time (19 time
 CHAPTER – III
INDUSTRY PROFILE
COMCPANY PROFILE
Industry Profile

In simple terms a depository is a Company where the securities of an investor are

held in electronic form. This is done at the request of the investor though a Depository
Participant (DP). If an investor wants to use services offered by a depository, he/she has
to open an account with the depository through a DP, much like opening an account with
any branch of a bank to utilize its services. When an investor buys share, they are
credited into his depository account and when he sells shares, they are debited to his
account.

Depository can in many ways be compared to a bank. Just as a Bank holds cash in
your account and provides all services related to transaction of cash, a depository holds
securities in electronic form and provides all services related to transaction of shares
/debt instruments. A depository interacts with clients through a Depository participant
(DP) with whom the client has to maintain a Demat Account. Several people consider the
Depository to be another custodian. But the depository has an advantage over the
custodian- the depository can transfer the Beneficial Ownership of the Securities legally,
which a custodian cannot do.

Legal status of a depositor

Depository as per the Depositories Act, 1996 means a company formed and registered
under the companies Act, 1956 and which has been granted a certificate of registration
under sub-section (1A) of section 13 of the SEBI ACT, 1992.

Depository system in India

India has a multi-depository system. Currently, there are two depositories in
India- NSDL & CDSL – to provide facilities for holding and handling securities in
electronic form & thereby eliminating problem that are normally associated with physical
certificates like mutilation, loss in transit, problem of bad delivery, etc.
National Securities Depository Ltd. (NSDL)
The National Securities Depository Limited (NSDL) is an organization
established to provide electronic depository facility for securities trade in the equity and
the debt market. NSDL is an organization promoted by Industrial Development Bank of
India (IDBI), Unit Trust of India (UTI) and National Stock Exchange limited (NSE).
Subsequently State Bank of India has also acquired a stake in NSDL.
NSDL has been registered by Securities Exchange Board of India (SEBI) on June 7, 1996
as India’s first Depository to facilitate settlement of securities in dematerialized from.
NSDL has commenced its operation on November 6 1996.
Services offered by NSDL
Basic Services
 Account maintenance e.g. Beneficiary Account, Clearing Member Account,
Intermediary Account, etc.
 Dematerialization (usually known as demat) is converting physical certificates to
electronic form.
 Rematerialization, known as remat, is reverse of demat, i.e. getting physical
certificates from the electronic securities.
 Non-cash corporate benefits, viz. Bonus / Rights – direct credit in electronic
form.
 Market transfers.
 Off-market transfers.
 Inter-depository transfers i.e. transfer of securities, change of beneficial
ownership.
 Corporate actions.
 Transmission of securities.
 Suspension of a client account.
Special Services
 Pledge/hypothecation of demat shares, viz. Loan against shares.
 Dividend distribution.
 Stock lending and borrowing.
 Public issues (Electronic credit in public offering of the Companies).
 Speed-e.
Central Depository Services of India Ltd. (CSDL)
Central Depository Services of (India) Ltd. was the second depository to be
granted the commencement certificate by SEBI on 8 February 1999, inaugurated on 16
July 1999. It is promoted by the Bombay Stock Exchange, in association with Bank of
India, Bank of Baroda. HDFC. Both NSDL and CSDL interface with investors through
their service providers known as “Depository Participant” (DP). The depository is
interconnected. It is possible to transfer shares from one depository to another.

Constituents of the Indian depository system

NSDL as the apex depository in the country has since its inception, built a network of its
business partners and 11 recognized stock exchanges. It interfaces with the following
entities that are also called as “business partners”.
They are:
1) The Depository (NSDL): The depository is entrusted with the securities for affecting
the transfer of ownership of the securities. It is the custodian of its client’s securities.
2) The Depository Participant (DP): The depository participant is the link between the
depository and the owner of securities. A DP is basically a service provider of the
depository. Therefore, the depository is responsible for any acts of omission and
commission on part of the DP.
3) The Beneficial Owner/Investor: The Beneficial owner is the real owner of the security
and lodges his securities with the depository in the form of book entries.
4) The Issuing Company/Registrar & transfer Agent (RTA): It is the company which
issues the security.
5) Clearing House/Clearing Corporation (CH/CC): It is entrusted with settlement of
transactions.

The Depository Systems

 DEPOSITORY
NSDL/ CSDL

CLEARING DEPOSITORY ISSUER/RTA

CORPORATION PARTICIPANT

BENIFICIARY
OWNER
Fig No. 1
Depository System

Depository Participant
A Depository Participant is an agent that provides depository services. There are
over 200 DPs in the country. The depository interfaces with the investors and clearing
members through its agents called “Depository Participants”. INDIA BULLS is
depository Participant.

Depository Participant Services

Any person interested to avail the services of a depository has to first open an
account with a registered depository participant.
Depository Participant services include a host of services few of which are given below
 Dematerialization of shares.
 Rematerialisation of shares.
 Pledge/Hypothecation of dematerialized securities.
 Tele-Depository services.
 Transfer of shares and settlements.
 Receipt of Corporate Benefits.
 Holdings and Transaction Statements on e-mail.
  Freezing / locking of Accounts.

Company Profile
Indiabulls is India’s leading Financial, Real Estate and Power Company with a
wide presence throughout India. They ensure convenience and reliability in all their
products and services. Indiabulls has over 640 branches all over India. The customers of
Indiabulls are more than 4,50,000 which covers from a wide range of financial services
and products from securities, derivatives trading, depositary services, research &
advisory services, consumer secured & unsecured credit, loan against shares and
mortgage & housing finance. The company employs around 4000 Relationship managers
who help the clients to satisfy their customized financial goals. Indiabulls entered the
Real Estate business in the year 2005 with its group of companies. Large scale projects
worth several hundred million dollars are evaluated by them.
Indiabulls Financial Services Ltd is listed on the National Stock Exchange (NSE),
Bombay Stock Exchange (BSE) and Luxembourg Stock Exchange. The market

capitalization of Indiabulls is around USD 2500 million (29 thDecember, 2006).

Consolidated net worth of the group is around USD 700 million. Indiabulls and its group
companies have attracted USD 500 million of equity capital in Foreign Direct Investment
(FDI) since March 2000. Some of the large shareholders of Indiabulls are the largest
financial institutions of the world such as Fidelity Funds, Goldman Sachs, Merrill Lynch,
Morgan Stanley and Farallon Capital.
Indiabulls Group is one of India’s top business houses with businesses spread over
Real Estate, Infrastructure, Financial Services, Securities, Retail, Multiplex and Power
sectors. The group companies are listed on important Indian and Overseas markets.
Indiabulls has been conferred the status of a “Business Superbrand” by The Brand
Council, Superbrands India.

VISION

To be the largest and most profitable financial services organization in Indian

retail market and become one stop shop for all non banking financial products and
services for the retail customers. To become the preferred long term financial partner to a
wide base of customers whilst optimizing stake holder’s value

MISSION

Rapidly increase the number of client relationships by providing a broad array of

product offering to emerge as a clear market leader. To establish a base of 1 million
satisfied customers by 2016. We will create this by being a responsible and trustworthy
partner.
COMPANY’S HISTORY IN INDIA
In 1999, three IIT-Delhi alumni Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal
acquired Orbis,a Delhi based stock broking company. Young entrepreneur Sameer
Gehlaut established Indiabulls in 2000, after acquiring orbis Securities, a stock brokerage
company in Delhi. The group started its operations from a small office near HauzKhas
bus terminal in Delhi.The office had a tin roof and two computers. The idea of leveraging
technology for trading stocks led to the creation of Indiabulls Incorporated on 10th
January 2000, it was converted into a public limited company on 27th February 2004.
Its original idea of leveraging technology bore fruit when Indiabulls was accorded
permission to conduct online trading on Indian stock exchanges.The company had
achieved the distinction of becoming only the second brokerage firm in India to be
granted this consent. The challenges facing it were immense – not least of all the mind set
of investors who were called to make the big leap from traditional stock trading to a
completely online interface. Having overcome this resistance, the company later
expanded its service portfolio to include equity, F&O, wholesale debt, mutual fund
distribution and equity research.
In 2003/04, Indiabulls ventured into insurance distribution and commodity trading. It
successfully floated its IPO in September 2004 and in the same year entered the
consumer finance segment. Real estate, the new sunrise industry, was the next frontier for
Indiabulls. In 2004/05, it entered this sector. But it wasn’t just real estate that was
booming. Opportunities were opening up in retail and infrastructure as well. To cement
its position in the Indian business and industry firmament, Indiabulls acquired Pyramid
Retail in 2007 and marked its presence in the power sector by launching Indiabulls
Power.

India bulls Financial Services Limited

Indiabulls Financial Services Limited was incorporated on January 10, 2000 as

M/s OrbisInfoTech Private Limited at New Delhi under the Companies Act, 1956.The
name of company was changed to M/s. Indiabulls Financial Services Private Limited
 on March 16, 2001. In the year 2004, Indiabulls came up with it own public issue &
became a public limited company on February 27, 2004. The name of company was
changed to M/s. Indiabulls Financial Services Limited.
The company was promoted by three engineers from IIT Delhi, and has attracted more
than Rs.700 million as investments from venture capital, private equity and institutional
investors and has developed significant relationships with large commercial banks such
as Citibank, HDFC Bank, Union Bank, ICICI Bank, ABN Amro Bank, Standard
Chartered Bank and IL&FS.

Brand Values
Indiabulls is amongst the largest non-banking financial services companies in
India and enjoys strong brand recognition and customer acceptance. The company
attributes its dominant position in the brokerage industry to the preferential status it
enjoys with investors Coupled with its forays into various segments; the Group believes
that the bulk of its brand story is yet to be written. Indeed, when a case study on India’s
youngest brands which have had a profound impact on the economy is crafted, Indiabulls
will feature prominently in it

INDIABULLS GROUP

 Total Group Networth – Rs. 19,502 Cr

 Total Group PAT for 9M FY 13-14 – Rs. 1,034 Cr.
 Total Group Capital Expenditure – Rs. 6,200 Cr. (US $ 1.2 bn.) capex in FY 10-
12. Planned capex of Rs. 29,000 (US $ 5.7 bn.) by FY 2015-15.
 Focus on Execution and on ground results translating into profits.
 For its ongoing projects Indiabulls Group consumes 385 MT of Steel,
550MT of Cement & 1,700 CUM of RMC on daily basis.
 Creating Value for Shareholders – Dividend payout of Rs. 543.6 Cr. in 9M FY13-
14

Products offeredEquities and Derivatives

 Offers purchase and sale of securities (stock, bonds, debentures etc.)
 Broker assisted trade execution
 Automated online investing
 Access to all IPO's
Our Management Team:

 Mr. Divyesh Shah ( Chief Executive Officer )

 Mr. Sujitraychowdary ( Vice President )
 Mr. R.Venkataraman (Executive Director)

The Board of Directors:

 Mr. Sat Pal Khattar (Non Executive Director)

 Mr. SanjivAhuja (Independent Director)
 Mr. NileshVikamsey (Independent Director)
 Mr. KrantiSinha (Independent Director)

Milestones Achieved

 Developed one of the first internet trading platforms in India

 Amongst the first to develop in-house real-time CTCL (computer to computer

link) with NSE

 Introduction of integrated accounts with automatic gateways to client bank

accounts

 Development of products such as Power Indiabulls for high volume traders

 Indiabulls Signature Account for self-directed investors

 Indiabulls Group Professional Network for information and trading service

STRATEGY AND FOCUS

 Consolidation – aim to be among top 3 players in existing businesses within next
3 years
 No new products – focus on gaining size and scale in existing core areas
  No capital market fund raising – all businesses are well funded to achieve growth
and size
 Goal- FY 2014/15 – target of US $ 1.5 billion in cash generation from the 3
companies (Finance, Real Estate and Power)
.MAJOR COMPETITORS

 KOTAK SECURITIES
 SHAREKHAN

ANALYSING THE COMPETITORS STRENGTH &WEAKNESS :-

Competition, being an important market force needs to be tracked, analyzed &preempted.
Market leader always have a system to help them preempt
anycompetitive moves. For this, it is not just important to know competitor by name,
but also critical to understand its major strength & weaknesses.
A competitor’s strength may be its marketing systems, aggressive sales force, and itsrelat
ionship with major external environmental variables like government &financial institute
or a financial resources base. For the effective competitiveanalysis only strength &
weaknesses are not sufficient we need to consider other key factors like market share of
the company & 7p s of service marketing i.e.
 Product
 Price
 Place
 Promotion
 Process
 Physical evidence

SWOT ANALYSIS

 Services: As products of India bulls is an extremely innovative product with very

less cost services like online trading facility, institutional and domestic broking,
customized research reports with almost 80% efficiency etc give India bulls an
edge over its competitors.

 Exposure updating tie-ups with leading banks

 Well diverse Investment portfolio

 India bulls has presence in the Real Estate, Infrastructure, Financial Services,
Securities, Retail, Multiplex and Power sectors

 Weaknesses

 It should have its own mutual funds as it provides advises on mutual funds

 Position to answer the question of the clients in their fields.

 It does not provide indices on major world markets, ADR Prices of Indian Scripts.

 Lacks Banking arm.

 Opportunities

 ATM facility should be provided for easy withdrawals.

 Tie-ups with third party companies for selling products.

 High client base will help for cross sales of its products.

 Threats

 Companies like Share khan, ICICI Direct, Kotak Securities and Private brokers
are major threats.

 Banks with Demat facilities are jockeying for position.

CHAPTER 4
DATA TABULATION

For this study, historical monthly data of previous 7 years have

been tabulated.

Table 1 : Table containing the Net FII Inflow. It has been taken as the net position of the Net
Inflow of FII at the end of each month. All amounts are Rs. In Crore.

Table 2 : Table containing the data of Exchange Rate of Indian rupee. All the amounts in
rupees (All the values have been taken as the position at the end of each month).
Table 4.1 : Net FII Investment (Monthly Position of Net FII Investment,
From 1st April 2010 to 31st March 2017 total 84 data point)

Sr.NO Duration In Month FII Net Inflow (Rs. In Crore)

1 Apr-10 572.38
2 May-10 1232.95
3 Jun-10 2592.95
4 Jul-10 2495.89
5 Aug-10 2128.14
6 Sep-10 4117.69
7 Oct-10 6939.72
8 Nov-10 3282.39
9 Dec-10 6290.59
17 Jan-11 2492.86
11 Feb-11 3182.74
12 Mar-11 8811.80
13 Apr-11 4214.86
14 May-11 -3151.29
15 June-11 511.00
16 July-11 1292.83
17 Aug-11 2850.25
18 Sep-11 2815.61
19 Oct-11 3952.11
20 Nov-11 6344.57
21 Dec-11 5890.00
22 Jan-12 1324.24
23 Feb-12 7493.76
24 Mar-12 7885.58
25 Apr-12 -946.29
26 May-12 -586.82
27 Jun-12 5699.40
28 Jul-12 7390.55
29 Aug-12 4154.87
30 Sep-12 3258.00
31 Oct-12 -3815.31
32 Nov-12 4559.14
33 Dec-12 9615.32
34 Jan-13 5177.18
35 Feb-13 7859.26
36 Mar-13 6347.74
37 Apr-13 722.14
38 May-13 -8930.32
39 Jun-13 1781.87
40 Jul-13 1773.16
41 Aug-13 3998.12
42 Sep-13 4624.13
43 Oct-13 5812.01
44 Nov-13 7028.59
45 Dec-13 -1869.49
46 Jan-14 3184.86
47 Feb-14 4279.14
48 Mar-14 2127.12
49 Apr-14 4257.88
50 May-14 3242.17
51 Jun-14 7217.02
52 Jul-14 19515.29
53 Aug-14 -6476.32
54 Sep-14 19823.40
55 Oct-14 16375.64
56 Nov-14 -3122.11
57 Dec-14 5124.92
58 Jan-15 -13000.98
59 Feb-15 7784.26
60 Mar-15 1354.39
61 Apr-15 1475.95
62 May-15 -3378.41
63 June-15 -17429.39
64 July-15 -1653.81
65 Aug-15 -2815.24
66 Sep-15 -7548.91
67 Oct-15 -13461.39
68 Nov-15 -2614.45
69 Dec-15 2214.88
70 Jan-16 -3897.01
71 Feb-16 -1758.84
72 Mar-16 521.87
73 Apr-16 8122.99
74 May-16 21114.76
75 June-16 4331.55
76 July-16 11987.48
77 Aug-16 3847.28
78 Sep-16 21034.61
79 Oct-16 8558.21
80 Nov-16 5728.01
81 Dec-16 17600.75
82 Jan-17 -2435.27
83 Feb-17 2734.14
84 Mar-17 19976.61
 Graph 4.1.1 : Net FII Investment (Closing Investment of
FII at the end of every month 30th April 2010 to 30th Mar
2011 )
Graph 4.1.2 : Net FII Investment (Closing Investment of FII at
the end of every month 30th April 2011 to 30th Mar 2012 )
Graph 4.1.3 : Net FII Investment (Closing Investment of FII at
the end of every month 30th April 2012 to 30th Mar 2013 )
Graph 4.1.4 : Net FII Investment (Closing Investment of FII at
the end of every month 30th April 2013 to 30th Mar 2014 )
Graph 4.1.5: Net FII Investment (Closing Investment of FII at
the end of every month 30th April 2014 to 30th Mar 2015 )
Graph 4.1.6: Net FII Investment (Closing Investment of FII at
the end of every month 30th April 2015 to 30th Mar 2016 )
Graph 4.1.7: Net FII Investment (Closing Investment of FII at
the end of every month 30th April 2016 to 30st Mar 2017 )
Table 4.2: Exchange Rate (Monthly Position of Exchange Rate at the end
of every month, from 1st April 2010 to 31st March 2017)

Sr.NO Duration In Month Exchange Rate

1 Apr-10 47.3758
2 May-10 47.1516
3 Jun-10 46.7168
4 Jul-10 46.2300
5 Aug-10 45.9330
6 Sep-10 45.8471
7 Oct-10 45.3873
8 Nov-10 45.5221
9 Dec-10 45.5880
17 Jan-11 45.4557
11 Feb-11 45.2710
12 Mar-11 45.0179
13 Apr-11 43.9311
14 May-11 45.2515
15 June-11 45.5138
16 July-11 46.1116
17 Aug-11 46.3417
18 Sep-11 46.1650
19 Oct-11 45.7826
20 Nov-11 45.1251
21 Dec-11 43.9796
22 Jan-12 43.7545
23 Feb-12 43.6798
24 Mar-12 43.6912
25 Apr-12 43.7412
26 May-12 43.4889
27 Jun-12 43.5836
28 Jul-12 43.5361
29 Aug-12 43.6245
30 Sep-12 43.9150
31 Oct-12 44.8180
32 Nov-12 45.7265
33 Dec-12 45.6411
34 Jan-13 44.3970
35 Feb-13 44.3289
36 Mar-13 44.4817
37 Apr-13 44.9491
38 May-13 45.4143
39 Jun-13 46.1261
40 Jul-13 46.4562
41 Aug-13 46.5370
42 Sep-13 46.1181
43 Oct-13 45.4676
44 Nov-13 44.8514
45 Dec-13 44.6351
46 Jan-14 44.3325
47 Feb-14 44.1583
48 Mar-14 44.0260
49 Apr-14 42.1482
50 May-14 40.7814
51 Jun-14 40.7736
52 Jul-14 40.4139
53 Aug-14 40.8212
54 Sep-14 40.3400
55 Oct-14 39.5114
56 Nov-14 39.4364
57 Dec-14 39.4395
58 Jan-15 39.3737
59 Feb-15 39.7326
60 Mar-15 40.3561
61 Apr-15 40.0224
62 May-15 42.1250
63 June-15 42.8202
64 July-15 42.8315
65 Aug-15 42.9374
66 Sep-15 45.5635
67 Oct-15 48.6555
68 Nov-15 48.9994
69 Dec-15 48.6345
70 Jan-16 48.8338
71 Feb-16 49.2611
72 Mar-16 51.2287
73 Apr-16 50.1319
74 May-16 48.5330
75 June-16 47.7714
76 July-16 48.4783
77 Aug-16 48.3350
78 Sep-16 48.4389
79 Oct-16 46.7211
80 Nov-16 46.5673
81 Dec-16 46.6288
82 Jan-17 45.9598
83 Feb-17 46.3279
84 Mar-17 45.4965
Graph 4.2.1 : Exchange Rate (Exchange Rate at the end of every month
from 30th April 2010 to 31st Mar 2011)
Graph 4.2.2 : Exchange Rate (Exchange Rate at the end of every month
from 30th April 2011 to 31st Mar 2012)
Graph 4.2.3 : Exchange Rate (Exchange Rate at the end of every month
from 30th April 2012 to 31st Mar 2013)
Graph 4.2.4 : Exchange Rate (Exchange Rate at the end of every month
from 30th April 2013 to 31st Mar 2014)
Graph4.2.5 : Exchange Rate (Exchange Rate at the end of every month
from 30th April 2014 to 31st Mar 2015)
Graph4.2.6 : Exchange Rate (Exchange Rate at the end of every month
from 30th April 2015 to 31st Mar 2016)
Graph 4.2.7 : Exchange Rate (Exchange Rate at the end of every month
from 30th April 2016 to 31st Mar 2017)
DATA INTERPRETATION AND ANALYSIS

Impact of FII Investment on the Indian Exchange rate can be observed by change in
the FII Investment then it can be affect the Exchange Rate. This impact can be statistically
represented through a regression line indicating the effect of net investment of FII on the
growth of the market capitalization

In this regression equation the net investment by FII is a dependent variable and the
Exchange Rate is an independent variable

Sr.No. Duration FII Investment Exchange Rate

($ Vs INR)

1 Apr-10 572.38 47.3758

2 May-10 1232.95 47.1516
3 Jun-10 2592.95 46.7168
4 Jul-10 2495.89 46.2300
5 Aug-10 2128.14 45.9330
6 Sep-10 4117.69 45.8471
7 Oct-10 6939.72 45.3873
8 Nov-10 3282.39 45.5221
9 Dec-10 6290.59 45.5880
17 Jan-11 2492.86 45.4557
11 Feb-11 3182.74 45.2710
12 Mar-11 8811.80 45.0179
13 Apr-11 4214.86 43.9311
14 May-11 -3151.29 45.2515
15 June-11 511.00 45.5138
16 July-11 1292.83 46.1116
17 Aug-11 2850.25 46.3417
18 Sep-11 2815.61 46.1650
19 Oct-11 3952.11 45.7826
20 Nov-11 6344.57 45.1251
21 Dec-11 5890.00 43.9796
22 Jan-12 1324.24 43.7545
23 Feb-12 7493.76 43.6798
24 Mar-12 7885.58 43.6912
25 Apr-12 -946.29 43.7412
26 May-12 -586.82 43.4889
27 Jun-12 5699.40 43.5836
28 Jul-12 7390.55 43.5361
29 Aug-12 4154.87 43.6245
30 Sep-12 3258.00 43.9150
31 Oct-12 -3815.31 44.8180
32 Nov-12 4559.14 45.7265
33 Dec-12 9615.32 45.6411
34 Jan-13 5177.18 44.3970
35 Feb-13 7859.26 44.3289
36 Mar-13 6347.74 44.4817
37 Apr-13 722.14 44.9491
38 May-13 -8930.32 45.4143
39 Jun-13 1781.87 46.1261
40 Jul-13 1773.16 46.4562
41 Aug-13 3998.12 46.5370
42 Sep-13 4624.13 46.1181
43 Oct-13 5812.01 45.4676
44 Nov-13 7028.59 44.8514
45 Dec-13 -1869.49 44.6351
46 Jan-14 3184.86 44.3325
47 Feb-14 4279.14 44.1583
48 Mar-14 2127.12 44.0260
49 Apr-14 4257.88 42.1482
50 May-14 3242.17 40.7814
51 Jun-14 7217.02 40.7736
52 Jul-14 19515.29 40.4139
53 Aug-14 -6476.32 40.8212
54 Sep-14 19823.40 40.3400
55 Oct-14 16375.64 39.5114
56 Nov-14 -3122.11 39.4364
57 Dec-14 5124.92 39.4395
58 Jan-15 -13000.98 39.3737
59 Feb-15 7784.26 39.7326
60 Mar-15 1354.39 40.3561
61 Apr-15 1475.95 40.0224
62 May-15 -3378.41 42.1250
63 June-15 -17429.39 42.8202
64 July-15 -1653.81 42.8315
65 Aug-15 -2815.24 42.9374
66 Sep-15 -7548.91 45.5635
67 Oct-15 -13461.39 48.6555
68 Nov-15 -2614.45 48.9994
69 Dec-15 2214.88 48.6345
70 Jan-16 -3897.01 48.8338
71 Feb-16 -1758.84 49.2611
72 Mar-16 521.87 51.2287
73 Apr-16 8122.99 50.1319
74 May-16 21114.76 48.5330
75 June-16 4331.55 47.7714
76 July-16 11987.48 48.4783
77 Aug-16 3847.28 48.3350
78 Sep-16 21034.61 48.4389
79 Oct-16 8558.21 46.7211
80 Nov-16 5728.01 46.5673
81 Dec-16 17600.75 46.6288
82 Jan-17 -2435.27 45.9598
83 Feb-17 2734.14 46.3279
84 Mar-17 19976.61 45.4965
The regression equation of Exchange Rate on the net inflow of FII can be given in the form
of

Y= a + b*X

To solve the above equation we need two more equation, given by:

∑ Y= N*a + b*∑ X and

∑ XY= a ∑X + b∑ X2

In the above equation, Y is exchange rate (Dependent Variable), X is Net FII Investment
(Independent Variable) and ‘a’ & ‘b’ are two constants which are known to be the
“intercept” and “slope” respectively.

With the help of the tabulated values we can construct a regression equation of Exchange
Rate on Net FII investment.

Y=0.576x-18992

a = 18992 is the intercept on Y axis & b= 0.576x is slope of the equation

By calculating the “Coefficient of Correlation” We can define the relationship of the two
variables Exchange Rate and Net inflow of FII.

Using the above tabulated values the coefficient of correlation is calculated to be

‘r’ = 0.133 which denotes the two variables having a very low positive relationship with
each other.

The value of r2 = 0.011 or 0.40% that indicated the effect of the FII inflow has about 0.40%
effect on Exchange Rate.
The Graphical representation of the regression equation is given below:-

The above graphical presentation of the regression equation Y =0.576x-18992 axis

denotes the Net investment done by the FIIs and Y axis denotes the subsequent
Exchange Rate.
Calculation of Standard Deviation measuring the for volatility Year
April2010-March2017
Ass. Mean 45
Period Exchange Rate(X) X=(X-A.M) X2
Apr-10 47.3758 2.3758 5.6444
May-10 47.1516 2.1516 4.3330
Jun-10 46.7168 1.7168 2.9234
Jul-10 46.2300 1.2300 1.5129
Aug-10 45.9330 0.933 0.8712
Sep-10 45.8471 0.8471 0.7176
Oct-10 45.3873 0.3873 0.1500
Nov-10 45.5221 0.5221 0.2726
Dec-10 45.5880 0.5880 0.3457
Jan-11 45.4557 0.4557 0.2147
Feb-11 45.2710 0.2710 0.7313
Mar-11 45.0179 0.0179 0.0010
Apr-11 43.9311 -1.1389 1.1425
May-11 45.2515 0.2515 0.1329
June-11 45.5138 0.5138 0.2568
July-11 46.1116 1.1116 1.1549
Aug-11 46.3417 1.3417 1.7983
Sep-11 46.1650 1.1650 1.1990
Oct-11 45.7826 0.7826 0.6125
Nov-11 45.1251 0.1251 0.0157
Dec-11 43.9796 -1.0211 1.1112
Jan-12 43.7545 -1.2455 1.5513
Feb-12 43.6798 -1.3202 1.7429
Mar-12 43.6912 -1.3165 1.7148
Apr-12 43.7412 -1.2588 1.5846
May-12 43.4889 -1.5111 2.2834
Jun-12 43.5836 -1.4164 2.0132
Jul-12 43.5361 -1.4639 2.1430
Aug-12 43.6245 -1.3755 1.8920
Sep-12 43.9150 -1.155 1.1772
Oct-12 44.8180 -0.182 0.10312
Nov-12 45.7265 0.7265 0.5278
Dec-12 45.6411 0.6411 0.4117
Jan-13 44.3970 -0.610 0.3636
Feb-13 44.3289 -0.6711 0.4511
Mar-13 44.4817 -0.519 0.2694
Apr-13 44.9491 -0.1216 0.0026
May-13 45.4143 0.4143 0.1659
Jun-13 46.1261 1.1261 1.1153
Jul-13 46.4562 1.4562 2.1212
Aug-13 46.5370 1.5370 2.3624
Sep-13 46.1181 1.1181 1.2501
Oct-13 45.4676 0.4676 0.2186
Nov-13 44.8514 -0.1493 0.0223
Dec-13 44.6351 -0.3649 0.1332
Jan-14 44.3325 -0.6675 0.4456
Feb-14 44.1583 -0.8417 0.7155
Mar-14 44.0260 -0.974 0.9487
Apr-14 42.1482 -2.8518 8.1328
May-14 40.7814 -4.2186 17.7966
Jun-14 40.7736 -4.2264 17.8625
Jul-14 40.4139 -4.5861 21.1023
Aug-14 40.8212 -4.1788 17.4624
Sep-14 40.3400 -4.6600 21.7156
Oct-14 39.5114 -5.4886 30.1247
Nov-14 39.4364 -5.5636 30.9536
Dec-14 39.4395 -5.5612 30.9192
Jan-15 39.3737 -5.6263 31.6553
Feb-15 39.7326 -5.2674 27.7455
Mar-15 40.3561 -4.6439 21.5658
Apr-15 40.0224 -4.9776 24.7765
May-15 42.1250 -2.875 8.2656
June-15 42.8202 -2.1798 4.7515
July-15 42.8315 -2.1692 4.7124
Aug-15 42.9374 -2.1326 4.2543
Sep-15 45.5635 0.5635 0.3175
Oct-15 48.6555 3.6555 13.3627
Nov-15 48.9994 3.9994 15.9952
Dec-15 48.6345 3.6345 13.2166
Jan-16 48.8338 3.8338 14.6980
Feb-16 49.2611 4.2611 18.1570
Mar-16 51.2287 6.2287 38.7967
Apr-16 50.1319 5.1319 25.6228
May-16 48.5330 3.5330 12.4821
June-16 47.7714 2.7714 7.6813
July-16 48.4783 3.4783 12.1686
Aug-16 48.3350 3.3350 11.1222
Sep-16 48.4389 3.4389 11.8260
Oct-16 46.7211 1.7211 2.9622
Nov-16 46.5673 1.5673 2.4564
Dec-16 46.6288 1.6288 2.6530
Jan-17 45.9598 0.9598 0.9212
Feb-17 46.3279 1.3279 1.7633
Mar-17 45.4965 0.4965 0.2465

3769.233 -17.767 582.65812

The Mean Value of the index value is 44.872
Variance = ∑ x2 /n-1, where n is the sample size (84)
Standard Deviation (σ) = Variance
= 2.650
Calculation of Standard Deviation for measuring the volatility Year Apr1990-
March1992
Ass.Mean 28
Period Exchange Rate(X) X'=(X-A.M.) X'2
Apr-90 25.94 -2.13 4.2436
May-90 25.92 -2.15 410264
Jun-90 25.91 -2.16 4.3681
Jul-90 25.84 -2.16 4.6656
Aug-90 26.2 -1.8 3.24
Sep-90 26.3 -1.7 2.89
Oct-90 27.9 -0.1 0.01
Nov-90 28.7 0.7 0.49
Dec-90 29.1 1.1 1.21
Jan-91 29.12 1.12 1.2544
Feb-91 28.59 0.59 0.3481
Mar-91 28.22 0.22 0.1184
Apr-91 27.79 -0.21 0.1141
May-91 27.94 -0.13 0.0106
Jun-91 28.16 0.16 0.0256
Jul-91 29.01 1.01 1.0201
Aug-91 28.87 0.87 0.7569
Sep-91 29.21 1.21 1.4641
Oct-91 28.76 0.76 0.5776
Nov-91 28.56 0.56 0.3136
Dec-91 28.34 0.34 0.1156
Jan-92 28.57 0.57 0.3249
Feb-92 28.39 0.39 0.1521
Mar-92 28.67 0.67 0.4489
670.01 -1.99 32.3417

The Mean Value of the index value is 27.9170

Variance =Σ X'2/n-1, where n is the sample size (24)
Standard Deviation (σ) = √ Variance
=
HYPOTHESIS TESTING

Hypothesis: 1

The hypothesis says that the net inflow of FII has appreciates the rupee value and
depreciates the Exchange Rate dollar Vs INR. The Appreciation of rupee can be measure by
calculating the regression line and coefficient of correlation of Net FII Inflow and the
Exchange Rate.

Calculation of Coefficient of Correlation

By calculating the “Coefficient of Correlation” we can define the relationship of the two
variables Exchange Rate and Net inflow of FII.

Using the above tabulated values the coefficient of correlation is calculated to be

‘r’ = 0.133 which denotes the two variables having a very low positive relationship with
each other.

The value of r2 = 0.011 or 0.40% that indicate the effect of the FII inflow has about 0.40%
effect on Exchange Rate.

Hypothesis: 2

The hypothesis says that the inception of the investment of FII has increased the volatility of
the Exchange Rate. The volatility can be measured by calculating the Standard Deviations
(σ) of the Exchange Rate before the investment allowed to FIIs and after the investment
done by the same

Calculation of Standard Deviation :

For calculating the standard deviation of the Exchange Rate when there was no investment
made by the FIIs, we have taken the time period of April 1990 to March 1992, total of 24
month’s observations, FIIs were allowed to invest in the Indian capital market since the
financial year 1992-93 onwards.

The mean index value of the Exchange Rate was calculated to be at 27.9170 By using the
formula for calculating Standard Deviation (σ) we get the value to be 1.186 The mean index
value of Exchange Rate Since April 2010 to March 2017 is 44.872 and Standard deviation
(σ) is 2.650.
The difference of the standard deviations of Exchange Rate before FII started investment in
India and after FII started the investment in India is degree of effect on exchange rate.
Investment of FII is not the only indicator of the volatility of the Exchange Rate.

There are more reasons as well:

A country’s exchange rate is typically affected by the supply and demand for that country’s
currency in international exchange markets and this supply and demand affected by
following reasons.
1. Rate of Interest

2. Rate of Inflation

3. Exchange rates are susceptible to political instability and anticipations about the new
government.

4. Domestic Financial Market

5. Strong Domestic Economy

6. Economic Data like GDP & CPI

7. Stock Market also have correlation with Exchange Rate.

8. Balance of Trade

9. Government Budget Deficit and Surpluses

17. Any rumor in the markets also leads to fluctuation in the Exchange Rate.

If we consider the volatility of the Exchange Rate has increased due to the above
mentioned reasons to be 17%, still the new standard deviation is more than 27.9417+ 17%
i.e..about 30.7351

Thus is quite obvious that the volatility of the Exchange Rate has increased since the
inception of FII investment
Therefore the hypothesis we constructed that the Net investment by FII has increased the
volatility of the Exchange Rate holds true, hence proved.

We can calculate the difference of the volatility of the Exchange rate (when FII
investment was not done and when FII investment are made), through t-Test by applying
suitable formula with the help of the two samples, their mean values and the standard
deviations.
 Chapter No.5

CONCLUSION
 CONCLUSION

The study of FII net inflow has shown the positive correlation with the exchange rate.
That means when the FII net inflow done then appreciates the Rupee Value and the
exchange rate increase and vice versa.

The Net FII Inflow/Outflow has increases the volatility of exchange rate. It proves
that Standard deviation of exchange rate before and after FII Inflow/Outflow. In this
Analysis standard deviation more after the FII investment started in India.

Volatility of the exchange rate denotes to the ups & down in the exchange rate due to
fluctuation of the FIIs.
BIBLIOGRAPHY

Book References:-

 Statistical Methods – Berry

 Research Methodology - C.R.Kothari.

 Foreign Exchange Management-D.Shivanandan

Official Websites:-

 National Stock Exchange (www.nseindia.com)

 Reserve Bank of India (www.rbi.org.in)

 Security and Exchange Board of India (www.sebi.gov.in)

 Ministry of Finance (www.financeministry.gov.in)

 www.google.com

 www.wikipedia.com