Foreign Institutional Investment is the investment made by the non Indian citizens/companies in the Indian market. Only individuals/companies registered with SEBI are allowed as Foreign Institutional Investors in India.
Foreign Institutional Investors help in improving the economical condition of the country. It helps in decreasing the fiscal deficit and increases the cash flow. It increases the domestic savings and the availability of capital reserve. It also helps in keeping the foreign exchange in control. The consequences of FII are that it leads to increase of liquidity as a result of release of rupee in the market, thus increasing the inflation.
It has been observed that the share indices on various Indian stock markets are highly dependent on the net inflow from Foreign Institutional Investors. Due to net flow of Foreign Institutional Investment being outward during 2011, there was a decline of around 25% in Nifty.
Why is Indian stock market so much dependent on FIIs? We can easily observe that FIIs has been much more than Direct Institutional Investment in India. During the last one year there was net outflow of Rs. 57,932.74 in DII while there has been inflow of Rs. 76,123.15 (Figures from May 2013 to April 2014). Thus Indian stock market and hence the Indian industries are more dependent on the FII for its growth. If the FIIs stops investing or the investors go for profit booking, it is observed that there is a fall in the share prices.
Now the question arises that for how long will the Indian economy and Indian industries depend on FII for its growth. There is a limit of 24% FII in the Indian companies. Once that value is reached for the companies, will the growth be stagnant. FII generally invest in the top few companies in a stock market. Is it possible that they will focus on other mid cap companies too for investment? We need to look for a way to minimize the dependency of Indian economy on FII and look for alternative ways to support Indian economy on the long run.