Foreign Institutional Investment and Stock Market Returns in India: An Empirical Investigation Thangamuthu Mohanasundaram1, Parthasarathy Karthikeyan2, Dhamodaran Shanthi3 1Department of Management Studies, Kongu Engineering College, Perundurai, Erode, Tamilnadu, India 2Department of Management Studies, Kongu Engineering College, Perundurai, Erode, Tamilnadu, India 3Department of Management Studies, Nandha Engineering College, Perundurai, Erode, Tamilnadu, India Online published on 4 March, 2016. Abstract The Indian financial market has been an eye-catching investment destination for the investors all over the globe. The ever growing contribution of Foreign Institutional Investors (FIIs) surely complements the inland investment but they are extremely volatile compared to other forms of investment flows. Therefore it becomes very much central to have an extensive study on the interconnection between Indian stock market and FIIs investment behaviour. This study considers daily data from April 2001 to March 2015. To ascertain the linkage between FII investments and Stock market returns, the entire study period has been divided into six phases based on the stock market trends. The Correlation Analysis, Granger Causality Test, Variance Decomposition and Impulse Response Function are carried out to know the relationship between FIIs and Indian Stock Market returns. The result indicates that Indian stock market returns Granger cause net FII investments. Nifty returns define FII investments more in all the phases than FII investments defining Nifty returns. It is also observed that Nifty returns define FII investments highly during bear market period than the bull market period. Top Keywords Nifty, Foreign Institutional Investor, Granger Causality, Variance Decomposition, Impulse Response Function, Stock market returns. Top |