In India, the major change in the capital flows, particularly in portfolio flows, took place due to the reforms in trade and industrial policy. FIIs are entities that are incorporated outside India but invest in India. FIIs are allowed to invest mostly in secondary markets and dated Government Securities. Allowing FIIs reduced the dependence on external commercial borrowing. Private foreign capital accounted for 70.29% of the total net capital account in 2001-02 against 21% in 1985-86. There has been a consistent upsurge in FIIs since 2002-03. The inflow of FII investments has helped the stock market to rise enormously. The policies of liberalisation and reforms have led to a favourable macro-economic environment. As per the reports, net FII investments contributed to nearly 28% of the country’s foreign exchange reserves. The evolution of various policy reforms on FIIs undertaken by the Indian Government made the presence of FIIs felt in the stock market of India. FIIs are generally interested in investing in capital market and this provides liquidity to capital markets and raises expectations of higher trading volume. Increase in the flow of capital would increase the stock prices. the cost of capital for a company would decrease with the higher flow of investments in the primary markets by FIIs. This would also help a corporation to have higher price earnings ratio.FII inflows are an alternative for the domestic savings and provides for the growth and performance of the economy.
