A comparative analysis of determinants of foreign institutional flows to Indian equity and debt markets

The volatile foreign institutional investment (FII) flow has an implicit effect on the stability of forex rates, stock prices, fiscal and monetary policies. Understanding the drivers of the FII flow to the equity and debt market is essential to manage future capital flows and prevent imbalances. The study examines determinants of FII flows to Indian equity and debt markets for the period 2011 to 2021 using autoregressive distributed lag model (ARDL) approach. The results indicated that the estimated coefficient of domestic stock returns positively impacted FII debt outflow. Stock returns of other emerging markets negatively impacted FII debt outflow and positively influenced FII equity inflow. US stock returns negatively impacted FII debt outflow and equity inflow in the long run. The study findings have useful implications not only for investors but also for regulators and policymakers to regulate capital flows and prevent imbalances through credible investment policies.