A Study on the Determinants of Foreign Portfolio Investment in India
Author : S Pravin and Dr. P Satheesh Kumar
Abstract :
This research paper analyzed the determinants of foreign portfolio investment in India during 1990-91 to 2022-2023. The correlation matrix shows that foreign portfolio investment is highly correlated with the share of market capitalization (0.756), GDP (0.703), foreign exchange reserves (0.612), and Openness (0.346). In contrast, the difference in interest rates between India and the US, as well as the debt-service ratio, has negative correlations with foreign portfolio investment. Additionally, the matrix indicates strong positive correlations between several of the explanatory variables. GDP is highly correlated with market capitalization, foreign exchange reserves, and the turnover ratio on the Bombay Stock Exchange. Foreign exchange reserves and market capitalization also show a significant positive correlation. The share of market capitalization is correlated with foreign exchange reserves and openness. The regression analysis found that GDP, openness, real effective exchange rate (REER), and debt-service ratio influenced portfolio investment during the study period. While the coefficients of these variables were not collectively significant (except for REER), they were individually statistically significant at the 1% level (equations 1, 2, and 4). In equation 5, openness and REER (with the expected negative coefficient) were statistically significant. Openness was also significant in equation 7, along with GDP and debt-service ratio, though the debt-service ratio coefficient was not highly significant. These results suggest that trade openness had the most influence on foreign portfolio investment inflows to India. GDP, REER, and the debt-service ratio also impacted foreign portfolio investment, but to a lesser degree. The elasticity of foreign portfolio investment with respect to openness was 5.49%, meaning a 1% change in openness led to a 5.49% change in foreign portfolio investment.
Keywords :
Portfolio, investment, debt, export, import, openness.
