Impact of Domestic Institutional Investors on Foreign Institutional Impact of Domestic Institutional Investors on Foreign Institutional Investors in India: An Analysis Investors in India: An Analysis

and Indian stock markets are no exception to this. FIIs bring liquidity, buoyancy and growth in stock markets but at the same time they also enhance the level of volatility and instability. Over past few years the stock markets in India have shown an impressive growth. The stock market indices are making new strides and increasing number of shares are making new highs. Following India’s impressive growth story, increasing corporate profitability and competitiveness, and better integration with the world economy, the investment by foreign institutional investors (FIIs) in the stock markets of India has gone up tremendously. Investment decisions of foreign institutional investors in India are affected by so many factors. Investment behavior of domestic institutional investors (DIIs) is one such important factor. This research paper is an attempt to analyze the impact of domestic institutional investors on the investment decision of foreign institutional investors in India. In other words, this study explores whether Domestic Institutional Investors affect the investment decisions of Foreign Institutional Investors in India or not. For this purpose, researchers have used regression analysis. Mutual fund investments have been taken as proxy for investment by DIIs. Investment patterns of FIIs and DIIs have been divided into eight variables i.e. FII Equity Purchases, FII Equity Sales, FII Debt Purchases, FII Debt Sales, MF Equity Purchases, MF Equity Sales, MF Debt Purchases and MF Debt Sales respectively. The study reveals that investment decisions of DIIs affect the investment decisions of FIIs.

Foreign institutional investors (FIIs) play a vital role in the stock market of a country and Indian stock markets are no exception to this. FIIs bring liquidity, buoyancy and growth in stock markets but at the same time they also enhance the level of volatility and instability. Over past few years the stock markets in India have shown an impressive growth. The stock market indices are making new strides and increasing number of shares are making new highs. Following India's impressive growth story, increasing corporate profitability and competitiveness, and better integration with the world economy, the investment by foreign institutional investors (FIIs) in the stock markets of India has gone up tremendously.
Investment decisions of foreign institutional investors in India are affected by so many factors. Investment behavior of domestic institutional investors (DIIs) is one such important factor. This research paper is an attempt to analyze the impact of domestic institutional investors on the investment decision of foreign institutional investors in India. In other words, this study explores whether Domestic Institutional Investors affect the investment decisions of Foreign Institutional Investors in India or not. For this purpose, researchers have used regression analysis. Mutual fund investments have been taken as proxy for investment by DIIs. Investment patterns of FIIs and DIIs have been divided into eight variables i.e. FII Equity Purchases, FII Equity Sales, FII Debt Purchases, FII Debt Sales, MF Equity Purchases, MF Equity Sales, MF Debt Purchases and MF Debt Sales respectively. The study reveals that investment decisions of DIIs affect the investment decisions of FIIs.

INTRODUCTION
Indian economy faced the balance of payment crisis in 1990-91 because of which government of India introduced the liberalization policy in 1991-92. During this era, on 14th September 1992, for the first time FIIs were permitted to invest in all the listed securities of Indian capital market to reduce country's dependence on debt-creating capital flows, correct the balance of payment position and develop the capital and security markets (Gordon and Gupta, 2003;Dhamija, 2008;Kaur and Dhillon, 2010;Loomba, 2012). Along with that, the new economic policy introduced large number of policy changes in India to integrate domestic financial market with global markets which would permit free flow of capital from developed to developing economies, resulting into higher rate of return, increased productivity and capital efficiency at global level (Chakraborty, 2007;Bekaert and Harvey, 2000).
Foreign capital plays a significant role in the development of every national economy (Goudarzi and Ramanarayanan, 2011). Apart from foreign investment, domestic investment also contributes towards the growth and development of capital market of the country.  (SEBI, 2018). At the end of same quarter, the number of FPIs registered with SEBI has increased to 9227 (SEBI, 2018).
Stock market returns are determined by the combination of domestic as well as foreign investments. Domestic or local investors seize greater knowledge about Indian financial markets than that of foreign investors who belong to some other country (Chakraborty, 2007). Over the last few years, FIIs and MFs both have contributed in the subsequent increase in the stock prices of Indian capital market (Mukherjee and Roy, 2011). Every investor has a similar objective of investment such as maximum returns, risk exposure, favorable economic and liquidity condition of the investing country (Anuradha and Rajendran, 2012). Stock market provides investors with large number of scrips with varying degree of risk, return and liquidity. This research paper is an attempt to analyze the impact of domestic institutional investors on the investment decisions of foreign institutional investors in India. The remaining paper progresses in the following manner: section two deals with the review of literature, while section three talks about objectives of this study. Section four entails database and methodology, describing the nature of data and sources from which relevant data has been collected, the tools and techniques employed in the study, followed by data analysis and interpretation in section five. Lastly, Section six deals with conclusion and discussion.

Determinants and Implications of FIIs in Indian Stock Market
The term FIIs has been conceptually and empirically explained by various researchers to illustrate its effectiveness in the Indian capital market. Rao, Murthy, and Ranganathan (1999) observed that only few FIIs are active on the Indian stock market. They further observed that US-based India specific funds suggested a close resemblance between FII investment profile and trading pattern at the BSE. Chakraborty (2007) detected the direction of causality between FII flows and Indian stock market returns anddescribed that the causality between FII flows and stock returns are highly model specific.
However, Srikanth and Kishore (2012) observed that there was bi-directional causality between net FII inflows and the Sensex which mutually reinforced each other. Jalota (2017) conducted a study on the behavioural aspects of FIIs and DIIs in order to study the relationship between the two. The study shows a high negative correlation between FIIs and DIIs. Salar (2016) conducted a study to judge the impact of DIIs on Indian stock market. He examined the relationship between DIIs and Sensex (representative of India stock market). The causality between the investments made by Domestic Institutional Investors and movement of Sensex were analyzed using Granger causality test. The data from 2009 to 2016 was analyzed by taking the net investments made by DIIs and closing values of Sensex. Periyasami and Kumar (2016) conducted a study to judge the impact of institutional Investors on Indian Stock Market. The study was conducted using the movement of Nifty with the contribution of DII and FII transactions from January2007 to August 2015. The study shows that there is a positive correlation between Institutional investments and market movement over the period. Srinivas (2016) conducted a study to find out the impact of FIIs on Indian Stock Market. The study covers statistical analysis of FII flows and its impact on the Sensex from 2008 to 2013, where the focus is Global financial crisis of 2008 and Euro zone crisis of 2011. The study shows positive correlation between the FII flows and the movement of Sensex. The study also reveals that FIIs are the dominant player in Indian stock market. Bhattacharje and Upadhyay (2014) concluded that there exists high degree of positive correlation ship between Sensex and FII inflows trends. FIIs have positive impact on BSE Sensex and Nifty. However, there are other major factors that influence the bourses in the stock market but FIIs definitely is one of the factors. This signifies that market rise with increase in FII's and collapse when FII's are withdrawn from the market. Prasanna (2008) highlighted about the contribution of FIIs particularly among the companies in the sensitivity index of the BSE. He alsoexamined the relationship between FIIs' investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. They pointed out that foreign investments are more in companies which have high volume of publicly held shares. They further found that in financial performance variables, share returns and earnings per share are more influencing variables on the investment decision. However, Gupta (2011) provided evidence which shows that Indian Stock Market and FIIs both influence each other but their timing of influence is different. Sehgal and Tripathi (2009) concluded that both the domestic foreign institutional investors (DFIIs) or MFs and FIIs follow a positive feedback trading mechanism chasing stock market returns and FIIs seem to be reacting faster compared to DFIIs in the case of the equity market. Saha (2009) found thatIndian market offers reasonable safe returns in the emerging market space. Bansal and Pasricha (2009) explained that there is no significant change in the Indian stock market average returns after the opening up of the stock market for the FIIs. According to Bohra and Dutt (2011) the behavior of FII in last decade was opportunistic whereas Profit accumulation was prime objective behind the portfolio investments in India.
Mukherjee and Roy (2011) compared the nature and determinants of MF decisions to that of the FIIs. Author s found that MFs influence the decision of FIIs when they invest in equity and FIIs do exactly opposite to what MFs do. MFs are more cautious when they invest in debt compared to equity. Jain, Meena, and Mathur (2012) observed that FIIs are influencing the Sensex movement to a greater extent. Sensex has increased when there are positive inflows of FIIs and vice-versa. Siddiqui and Azad (2012) found that FIIs have a significant influence on the Indian financial market indices. Loomba (2012) provided the evidence of significant positive correlation between FII activity and effects on Indian Tanu Jain & Satyendra P. Singh Capital Market. Bose (2012) explored the interaction between the investment flows of FIIs and MFs of the post crisis period from April 1, 2008 to March 31, 2012 on daily basis. The author found strong negative relationship between them. Domestic MFs determined their investment flows on the basis of their own previous investments, FII investments and market returns. Dasgupta (2012) aimed to investigate the impact of and relationship between FII and MF net flows in Indian stock market from April 2007 to March 2012 using monthly data. The study found no short term as well as long term relationship between them.

Determinants and Implications of FIIs in Global Stock Market
The significance of FII flows has been observed all over the world. Various researchers have provided an evidence regarding the importance of FIIs in Global Stock Markets. The researchers particularly Aggarwal, Klapper, and Wysocki (2005);Chen, Wang, and Lin (2008); Ting, Yen, and Chiu(2008); Burnie and Ridder (2009) ;Kim, Sul, and Kang(2010); Lee and Fang (2011); Bredin and Liu (2011);Boubakri, Hamza, and Kooli (2011);Abdioglu, Khurshed, and Stathopoulos (2012) have observed about the market behavior of US, Taiwan, China, Sweden and Korea market. Aggarwal, Klapper, and Wysocki (2005) examined that at the country level, US Mutual funds invest more in open emerging markets with stronger accounting standards, shareholder rights, and legal frameworks. At the firm level, US funds are found to invest more in firms that adopt discretionary policies such as greater accounting transparency and the issuance of an ADR. Stepanyan (2011) examined the role of institutional investors in accelerating the development of capital markets and economies abroad, the determinants of their investment, both in the domestic and foreign markets. Abdioglu, Khurshed, and Stathopoulos (2012) observed the investment preferences of foreign institutional investors investing in the U.S. market. The study analyzed both firm and country-level determinants that influence the foreign Institutional investors' allocation choices.
However, In the Global context the researchers have given more emphasis to Corporate Governance Practices (Chen, Wang, and Lin, 2008;Kim, Sul, and Kang, 2010;Bredin and Liu, 2011;Stepanyan, 2011;Abdioglu, Khurshed, and Stathopoulos, 2012) which is an important determinant attracting more FII inflows into the stock market.

OBJECTIVES OF STUDY
The study has been conducted keeping in minds the following objectives: 1. To evaluate the impact of inflow and outflow decision of domestic institutional investors on foreign institutional investors' inflow and outflow decision in India 2. To find out whether there is any contrast relationship between purchase and sales decisions of foreign and domestic institutional investors in India or not

Sample and Data Collection
The time series data have been taken in the study that is quantitative and secondary in nature. Mutual fund investment has been taken as proxy for domestic institutional investors (DIIs). To address the objective and gather the relationship between the FIIs and DIIs inflow and outflow decisions, their investment patterns have been divided into eight variables namely FII Equity Purchase, FII Equity Sales, FII Debt Purchase, FII Debt Sales, MF Equity Purchase, MF Equity Sales, MF Debt Purchase and MF Debt Sales respectively. Inflow and outflow of funds by both these investors class have been segregated into their equity and debt investment in order to conduct in depth study. Required data has been collected from the website of Securities and Exchange Board of India (SEBI) and National Securities Depository Limited (NSDL). Acronyms have been used for all the variables. The description of the variables along with the sources from which the data has been collected is presented in the Table 1. The time frame for the study has been taken from financial year 2001-02 to 2016-17 and the data has been collected on monthly basis.

Statistical Tools and Techniques
Collected data has been analyzed by applying relevant statistical tools such as Correlation and Linear Regression Analysis to address the objectives of the study. SPSS 16.0 version is used to analyze the collected data.

Model / Hypotheses Framing
Dependence of one variable on other variable (s) could be predicted through Regression analysis.
It requires formulation of regression models to determine relationship among the variables. In the study, FII is considered as dependent whereas MF as independent variable. The study also deals with the contrast relationship between FIIs equity and debt purchase and sales decision with MFs equity and debt purchase and sales decision. Total eight models have been framed to test the relationship between these two investor classes. Hypotheses behind the models are shown in the Table 2.

Correlation Analysis: Results and Interpretation
Correlation analysis describes the degree and strength of relationship among the variables. It does not deal with the causality and only defines whether the relationship between the variables exists or not? Table 4, shows the bivariate relationship among all the variables. The values depict high degree of positive and strong association among the variables in the study. All the variables are found to be significant at 0.1% significance level. The result indicates that these two investor classesare highly associated with each other and could influence the decision of each other in India. Hence, their patterns of investments are strongly correlated in Indian capital market.

Regression Analysis: Results and Interpretation
Model summary (Table 5) describes the acceptability of the models. To check the validation of the models, R, R-square and adjusted R-square values are considered. R represents the multiple correlation coefficients between dependent and independent variable(s). In this study, linear regression analysis has been applied and therefore the value of R is same as that of the value of correlation coefficients (Table 4). R-Square is a squared value of R and defines the explanatory power of the model. Explanatory power of the model would increase with the higher R-square value . Values of R-Square are0.753, 0.774, 0.710, 0.699, 0.812, 0.821, 0.698 and 0.681 Tanu Jain & Satyendra P. Singh respectively for all the eight models, indicating that 75.3%, 77.4%, 71%, 69.9%, 81.2%, 82.1%, 69.8% and 68.1% of the variance in dependent variable (FIIs) can be predicted through independent variable(s) (MFs).For better acceptability of model, value of adjusted R square should be close to the value of R square . In thegiven table values of adjusted R square is 0.751, 0.773, 0.709, 0.698, 0.811,0.820, 0.696 and 0.679satisfying the required criteria.  465.676, 441.886, 819.213, 871.262, 439.311and 404.955) for all the models are found to be highly significant at 0.1% level of significance indicating the statistical significance of the models.  Table 7 provides value of beta coefficient. Beta coefficient replicates change in dependent variable with the change in independent variable , Field, 2009. This is used to evaluate virtual strength of various independent variables within the model. Significance level would be small with the larger beta coefficient values. In case of simple linear regression analysis, beta value would be same as the value of R. T value reflects whether the beta value is significantly different from 0 or not? As per the Table 7, the values of t for all the independent variables (t = 24.042, t = 25.534, t = 21.578, t = 21.021, t = 28.622, t = 29.517, t = 20.960and t = 20.123) are found to be significant at 0.1% significance level, indicating that DIIs are significant predictors of FIIs.

CONCLUSION AND DISCUSSION
There are two major investor classes in Indian stock market i.e. domestic and foreign. Both of them play a vital role in the development and expansion of economy. They are like two wheels in the vehicle. As without one wheel the vehicle cannot move properly, similarly the market with single investor class may not be in a position to move smoothly. But, at the same time, their investment patterns are different from each other. As per the data released by Securities and Exchange Board of India for the duration of 2001-02 to 2016-17, consistently MFs have registered lower amount in their equity investment than debt investment, while FIIs have shown opposite pattern with higher amount of investment in equity than debt. On one hand, MFs believe in safe investment by investing large amount in debt than equity investment, while on the other hand FIIs follow the pattern of risk return trade off by investing more in equity than debt. (See figures 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7 and 1.8).  On applying regression analysis, it is concluded that inflow and outflow decisions of DIIs significantly affect the inflow and outflow decision of FIIs to invest money in capital market. Investment by DIIs presents internal stability of the market in front of macro-economy that enhances the confidence of FIIs to invest in Indian market. Hence, the decision of domestic investors has an impact on the investment decision of FIIs.