Transmission Effects of Exchange Rate on Foreign Institutional Investments in India

The ever increasing number of FIIs (Foreign Institutional Investors) and their investments from various countries in various denominations in the last ten years has drawn the attention of policy makers and investors. This paper attempts to investigate the direction and dynamic interaction between four major exchange rates viz. Dollar, Euro, Pound and Yen and net FII flows in India using daily data of exchange rates and net Fit flows. The direction of relationship is also computed by using Granger Causality Test and the dynamic interaction is quantified by VAR results and Impulse Response Function at six lags. Results show that dollar exhibit bi-directional relationship whereas pound and yen have one sided influence on net foreign institutional investments. Further it is also evident from Impulse Response Function that exchange rate shocks die out in two days whereas net FII flows contain it for five to six days. On the other hand regression results validate that the net FII flows are positively correlated to rupee appreciation in dollar and yen and negatively correlated to rupee appreciation in pound and euro, but euro have insignificant influence in Indian economy.