Foreign Institutional Investors and Dynamics of Indian Capital Market

Abstract

This study examines the impact of Foreign Institutional Investors (FIIs), also referred to as Foreign Portfolio Investors (FPIs), on the growth, liquidity, and trading performance of the Indian capital market over the period 2015–2025. The primary objective is to assess whether foreign institutional investment contributes to market development and efficiency or leads to changes in market dynamics. Using secondary data collected from reliable financial and regulatory sources, the study evaluates the relationship between FII/FPI investment flows and key indicators of capital market performance. The empirical analysis is based on three widely recognized market indicators: the Market Capitalization Ratio (MCR), which measures the size of the capital market relative to Gross Domestic Product (GDP); the Turnover Ratio (TR), which reflects market liquidity and trading efficiency; and the Value Traded Ratio (VTR), which assesses trading activity in relation to the overall economy. To obtain accurate and meaningful results, the study applies the Augmented Dickey–Fuller (ADF) test to verify the stability of the time-series data and uses the Pairwise Granger Causality test to identify the direction of influence between FII/FPI investment flows and the selected indicators of the Indian capital market. The findings provide evidence on the extent to which foreign institutional investment influences market liquidity, trading activity, and overall market development. The study contributes to the understanding of the role of FIIs/FPIs in the Indian capital market and offers useful insights for policymakers, regulators, investors, and researchers in designing strategies that promote sustainable market growth while maintaining financial stability.