Foreign Institutional Investors (FII) participation in the Indian stock market triggers its upward movement, but, at the same time, increased liquidity through FII investment inflow increases volatility too. The article examines various issues relating to the same.

Asignificant improvement has taken place in India relating to the flow of foreign capital during the period of post-economic reforms. The major change in the capital flow particularly in Foreign Institutional Investors (FII) investments has taken place following the reforms in trade and industrial policy. The FIIs are entities who are established or incorporated outside India and invest in India¹. They invest mostly in secondary markets and dated government securities. The exchange rate policy has also experienced massive changes during the period of economic liberalization. Due to the increase in foreign capital inflow, dependence on external commercial borrowing has reduced to a significant extent. Private foreign capital accounted for 70.29% of the total net capital account in 2001-2002 against 21% in 1985-1986.

There has been a consistent upsurge in foreign institutional investment since 2002-2003. Inflows averaged $9599 mn during 2003-2005. In 2005-2006 this amount would exceed $10,000 mn. According to the data released by Sebi, while cumulative net FII investment flow into India from 1992 to 2002-2003 was $15,804 mn. It went up to $25,267 mn at the end of December 2005. The inflow of FII investments has helped the stock market to rise at a great height according to financial s. Sensex touched a new high. It crossed 10000-mark in January 2006, which was 8073 on November 2, 2005 and 9323 in December 2005. This historical movement is also due to the other parameters of the economy, which are favorable for investment. The returns on investment are also much favorable. The profit performance of the firms may explain the reasons for high return on investment. There are other factors such as favorable tax laws and relaxation on the caps of various kinds of investments. The policy measure and macro-economic factors are also the reasons for investors' confidence. Of course, the policies of liberalization and continuous reforms have given rise to such a favorable macro-economic environment. According to reports, net FII investment flows have increased to such an extent that it has contributed nearly 28% of the country's foreign exchange reserves.

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