Covid-19 and Determinants of Foreign Portfolio Investment (FPI) Flows to India

Abstract

Foreign Portfolio Investment (FPI) plays a vital role in deepening financial markets, enhancing liquidity, and integrating emerging economies like India into the global capital system. Unlike Foreign Direct Investment (FDI), FPI involves short-term, non-controlling investments in equities, bonds, and hybrid instruments, making it sensitive to global economic, financial, and political conditions. This study examines the determinants of Net FPI inflows into India across pre-COVID (April 2012–March 2020) and post-COVID (April 2021–March 2025) periods, highlighting shifts in investor behavior and market dynamics. Using monthly data from RBI, NSDL, NSE, MOSPI, Bloomberg, and S&P Dow Jones, the study applies the Augmented Dickey-Fuller (ADF) test for stationarity and the Autoregressive Distributed Lag (ARDL) model to analyze short-run relationships between Net FPI and key domestic and global factors, including inflation (CPI), industrial production (IIP), broad money supply (M3), stock market performance (Nifty 50 and S&P 500 growth), exchange rate (INR/USD), market volatility (NSE VIX and USA VIX), and the Global Economic Policy Uncertainty (GEPU) index. Results indicate that pre-COVID inflows were influenced by past FPI trends, domestic inflation, exchange rate movements, stock market returns, and global policy uncertainty, while industrial production and S&P 500 returns had counter-cyclical effects. Post-COVID, determinants shifted toward domestic growth fundamentals, currency movements, and global uncertainty, with inflation and volatility losing significance. Global market performance, particularly the S&P 500, consistently showed a substitution effect. Diagnostic tests confirm model stability, and R-squared values indicate strong explanatory power. The study suggests that post-COVID, foreign investors prioritize growth fundamentals and global risk over short-term domestic fluctuations. For policymakers, this underscores the importance of macroeconomic stability, clear communication, and effective risk management to attract and sustain FPI. By integrating long-term monthly data with advanced econometric techniques, the research provides actionable insights for portfolio managers, regulators, and corporate strategists navigating India’s dynamic investment landscape.