FPI in It Sector: Navigating Investment Flows and Market Volatility

Purpose of the study:

Examining and evaluating the short- and long-term linkages and correlations between foreign portfolio investment flows in the Indian IT sector and the performance of IT companies in the Indian equities market is the aim of this study. This study looks into the effects of foreign portfolio investments in the IT industry on sectoral returns and the volatility of pertinent sector stock indices.

Design/Methodology/Approach:

For an eleven-year period, from April 2012 to March 2023, the current study employs weekly time series data of the FPI, VIX, interest rate, CPI, and exchange rate USD-INR for the IT sector. In order to accomplish the stated goal of the study, this work applies the Granger causality test and the Johansen Cointegration test. After stationarity has been established, the next step is to search for autoregressive conditional heteroscedasticity (ARCH). GARCH (2,1) is the most acceptable predictor for determining the level of volatility in the IT industry because weekly data was used in this study.

Findings:

The results determined that there is a bidirectional Granger Causality between FII-IT movements and Nifty-IT movements. The IT sector's long-term FPI movements were positively correlated with returns, as demonstrated by the findings of Johansen's Co-integration Test. The results also show that as FPIs increase, stock values decrease because stock prices are increasingly susceptible to their selling pressure. A study showed a connection between FII inflows and outflows and surges in the volatility of the IT industry.

Implications and Recommendations:

The study provides policymakers with a number of recommendations for bolstering the Indian stock market. First, given the current state of the economy, India has embraced a policy to encourage Foreign Portfolio Investors (FPIs) in its capital markets. This is because FPIs boost capital inflows into the nation while maintaining the nation's low level of foreign debt. Second, increased financial stability and efficiency are needed by small-cap companies, particularly those that are still developing. Due to this fact, the government must create appropriate rules for their sustainable financial development.