Interrelationship between FII and Stock Market and their Causal Relationship with Selected Macroeconomic Variables in India

This paper tries to explore the causal relationship between Foreign Institutional Investment (FII) and Indian Stock Market. Further, the paper examines whether they individually create impact on certain selected macroeconomic variable sand vice versa. Sensex is taken as a representative of Indian Stock Market. Inflation as measured by Wholesale Price Index (WPI), national output as represented by Index of Industrial Production (IIP) and Exchange Rate are the three macroeconomic variables considered for the study. The monthly data of the selected variables for the period from April 2005 to March 2013 is taken for the study. Correlation and Granger causality test have been used to study the causal relationship between FII&Sensex and their causal relationship with the macroeconomic variables. Our results show that a) there is a bidirectional relationship between FII and Sensex, FII and Exchange Rate b) there is unidirectional relationship between Sensex and IIP, Sensex and WPI, FII and IIP&FII and Exchange Rate and c) there is no relationship between FII and WPI.