ABSTRACT
The report of the project “Foreign direct investment (FDI) and foreign institutional investors
(FII) in India” mainly focused on the following areas:
A) FOREIGN DIRECT INVESTMENT (FDI)
Net foreign direct investment (FDI) flows into India reached 70630 crore in India’s 2006–07 fiscal
year, means increase of 187% of the 24613 crore recorded during 2005–06, with the largest share of
FDI flows from Mauritius, followed by the United States and the United Kingdom. This study
examines FDI in India, in the context of the Indian economic and regulatory environment. This study
present FDI trends in India, by country and by sectors during the post liberalization period that is
1991 to 2007 year, using official government data from Indian official government internet site like
that of RBI, SEBI. To illustrate the driving forces behind these trends, the study also discusses the
investment climate in India, Indian government incentives to foreign investors, the Indian regulatory
environment as it affects investment, and the effect of India’s global, regional, and bilateral trade
agreements on investment from top 10 FDI investing countries. Finally, the study examines global
FDI in India’s in top 10 sectors of industry.
B) FOREIGN INSTITUTIONAL INVESTORS (FII)
Institutional Investor is any investor or investment fund that is from or registered in a country outside
of the one in which it is currently investing. Institutional investors include hedge funds, insurance
companies, pension funds and mutual funds. The growing Indian market had attracted the foreign
investors, which are called Foreign Institutional Investors (FII) to Indian equity market, and this study
present try to explain the impact and extent of foreign institutional investors in Indian stock market
and examining whether market movement can be explained by these investors. It is often hear that
whenever there is a rise in market, it is explained that it is due to foreign investors' money and a
decline in market is termed as withdrawal of money from FIIs. This study tries to examine the
influence of FII on movement of Indian stock exchange during the post liberalization period that is
1991 to 2007.
1 . INTRODUCTION
Foreign investment refers to investments made by the residents of a country in the financial assets and
production processes of another country. The effect of foreign investment, however, varies from
country to country. It can affect the factor productivity of the recipient country and can also affect the
balance of payments. Foreign investment provides a channel through which countries can gain access
to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional
investment (FII). Foreign direct investment involves in direct production activities and is also of a
medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly
in the financial markets. FII, given its short-term nature, can have bidirectional causation with the
returns of other domestic financial markets such as money markets, stock markets, and foreign
exchange markets. Hence, understanding the determinants of FII is very important for any emerging
economy as FII exerts a larger impact on the domestic financial markets in the short run and a real
impact in the long run. India, being a capital scarce country, has taken many measures to attract
foreign investment since the beginning of reforms in 1991.
India is the second largest country in the world, with a population of over 1 billion people. As a
developing country, India’s economy is characterized by wage rates that are significantly lower than
those in most developed countries. These two traits combine to make India a natural destination for
foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however,
India has attracted only a small share of global foreign direct investment (FDI) and foreign
institutional investment (FII), primarily due to government restrictions on foreign involvement in the
economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its
investment regulations and actively encouraged new foreign investment, a sharp reversal from
decades of discouraging economic integration with the global economy.
The world is increasingly becoming interdependent. Goods and services followed by the financial
transaction are moving across the borders. In fact, the world has become a borderless world. With the
globalization of the various markets, international financial flows have so far been in excess for the
goods and services among the trading countries of the world. Of the different types of financial
inflows, the foreign direct investment (FDI) and foreign institutional investment (FII)) has played an
important role in the process of development of many economies. Further many developing countries
consider foreign direct investment (FDI) and foreign institutional investment (FII) as an important
element in their development strategy among the various forms of foreign assistance.

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