A Study on Impact of Foreign Institutional Investors on Indian Capital Market Volatility

This Master thesis investigates the "Impact of Foreign Institutional Investors (FIIs) on Indian Capital Market Volatility," offering a comprehensive exploration into how FIIs activities influence market dynamics within one of the world's most vibrant emerging economies.Utilizing monthly data from 2012-2024, this study applies advanced financial econometrics models to delve into the relationship between FIIs, Nifty 50 index prices, exchange rates (USD-INR), and the implied volatility of the Nifty Index (India VIX).The research employs a methodical approach, beginning with stationarity tests (Augmented Dickey-Fuller) to ensure the reliability of time series data.Subsequently, Granger causality tests is utilized to examine the dynamic interactions and causality between FIIs behaviours and market volatility.Key findings of this study reveal a significant relationship between FIIs flow and market volatility, challenging traditional notions of market efficiency and highlighting the dual role of FIIs as both stabilizers and destabilizers of market conditions.The study's implications extend to policymakers, suggesting the need for minute regulatory measures, and to investment managers, underlining the importance of advanced risk management strategies that account for FIIs-induced volatility.This thesis contributes to the academic discourse on international finance, offering empirical evidence from the Indian context that enriches our understanding of global financial markets' interconnectedness and the pivotal role of institutional investors in shaping market dynamics.It bridges theoretical frameworks with practical insights, paving the way for future research to further explore the complexities of foreign investment in emerging markets.