Authors: Dr. Isha Patnaik
Abstract: This study examines the relationship between stock market volatility and Foreign Institutional Investment (FII) in India, with particular emphasis on the evolving role of domestic institutional investors in moderating market fluctuations. The Indian capital market has experienced significant structural changes over the last decade due to increased globalization, rising foreign capital inflows, and growing participation of domestic institutions and retail investors. While FIIs have historically been considered major drivers of market movements, recent developments suggest that domestic institutional investors (DIIs) have emerged as a crucial stabilizing force. The study employs a comprehensive analytical framework using time-series econometric techniques, including stationarity tests, Granger causality analysis, and GARCH-family models, to investigate the dynamic relationship between institutional investment flows and market volatility. The analysis is based on longitudinal data covering the period from 2012 to 2024, with a focus on the Nifty 50 index and key sectors such as banking, information technology, and fast-moving consumer goods. The findings indicate that FII flows significantly influence short-term market volatility and are often associated with heightened market uncertainty during periods of global economic stress. However, the results also reveal a gradual structural shift in the Indian market, where increasing domestic institutional participation mitigates the adverse effects of foreign capital outflows. The study highlights that domestic investors increasingly act as liquidity providers during volatile periods, thereby enhancing market resilience and reducing dependence on foreign capital. Furthermore, the research emphasizes the growing impact of algorithmic trading, retail participation, and technological innovations on market dynamics. The findings suggest that while FIIs continue to affect short-term price movements, the long-term stability of the Indian stock market is increasingly supported by strong domestic investment flows. The study contributes to the literature on emerging market finance by providing evidence of India's transition from foreign capital dependence toward a more balanced and resilient investment ecosystem, offering valuable implications for policymakers, investors, and market regulators.
DOI: http://doi.org/10.5281/zenodo.20443289
