How Does Indian Stock Market Benefit From Increase Investment Inflow From FPI's & FII’s?

7 Aug 2019by Research and Ranking

How Does Indian Stock Market Benefit From Increase Investment Inflow From FPI's & FII’s?

Foreign Portfolio Investors (FPI’s) & Foreign Institutional Investors (FII’s) have been one of the biggest drivers of Indian stock market. According to data available publicly, Foreign Portfolio Investors (FII’s) & Foreign Institutional Investors (FII’s) have invested over US$ 171.81 billion in India during the period between the years 2002 to 2018.  FPI’s & FII’s find India an attractive destination because of the highly developed Indian stock market.

Though currently there is a lot of sell-off by FPI’s post the FPI tax announced in Budget 2019 the overall picture looks positive. Prime Minister’s Office (PMO) and finance ministry’s top bureaucrats recently held discussions over the suggestions and submissions by foreign portfolio investors (FPIs) regarding the surcharge issue. FPIs have sought rollback of surcharge. If implemented it will be seen as a confidence-boosting signal from the Narendra Modi led NDA 2.0 government.

The opening up of Indian economy in the year 1991, unlocked greater and better opportunities to attract the foreign funds in the Indian stock market. RBI’s decision to allow SEBI registered FIIs/NRIs/PIOs/OCBs to invest in Indian stock market the Indian stock market through the portfolio investment scheme was a game changer. Entities that can register as FIIs include asset management companies, pension funds, mutual funds, banks, investment trusts, nominee companies, incorporated/institutional portfolio.

Benefits Of Increased FPI & FII Investment For Indian Stock Market

In the past, foreign portfolio investment has played an important role in determining the overall balance of payments. Foreign portfolio investment enlarges the liquidity of domestic capital markets, and as well as develops market efficiency. As markets become more liquid, a wide variety of investments can be financed. The greatest beneficiaries of this will be start-ups.

Another advantage of foreign portfolio investment is that they bring discipline and knowledge into the Indian stock market. In broader market, investors can reap greater rewards by investing in emerging investment opportunities. As businesses compete for financing, they will face demands for better information as foreign portfolio investors generally ask for a higher level of information disclosure and accounting standards, and bring with them a rich experience.

Higher inflow of foreign portfolio investment helps in boosting the Indian stock market. As the market's liquidity and functionality progresses, equity prices will increasingly reflect the fundamental values of the firms, enhancing the more efficient allocation of capital flows.  Foreign portfolio investors also support the domestic capital markets by introducing more sophisticated technologies for managing portfolios.

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