CDE

November 2015

FOREIGN PORTFOLIO INVESTMENT FLOW TO INDIA:

TREND ANALYSIS

2012-2015

Aayush Makkar

15IB303

Global Business Environment

Submitted to:-

Prof. Ritu Srivastava

Birla institute of management technology,

Greater Noida

FOREIGN PORTFOLIO INVESTMENT FLOW TO INDIA: TREND ANALYSIS

(2012-2015)

Aayush Makkar

Abstract

This paper analyses flow of foreign portfolio investment (FPI) in India from period 2012-2015. This

paper also looks at components of FPI – debt and equity and industry wise FPI inflow during the

period is also provided.

time series analysis is done under exploratory analysis using line chart. It was noticed that trend

of FPI was quite volatile resulting in zig zag line curve with one shocking decline in may2013.

Recent trend of FPI in nov 2015 shoes outflow of INR 9000 crore. This decline can be due to tepid

domestic demand resulting in week September quarter earnings of Indian companies, week global

demand, melt down of china and expectation of interest rate hike by fed reserve resulting on

outflow of investment from emerging markets including India.

Equity is preferred for FPI in 2012-2013 but reversal of trend can be seen in 2014-2015 when debt

instrument got majority of FPI. Investors did not find equity giving enough risk adjusted return so

they shifted toward debt instruments.

Sector wise trend of FPI is also discussed in the study.

1. INTRODUCTION

Since 1991, when the government of India opened its economy for foreign investment FPI is a

major source of investment in Indian financial market. Foreign Portfolio investment or FPI is

investment made in India by foreign investors such as governments, mutual funds, pension funds

or institutional investors in financial market with expectation of returns on the investment made.

FPI can be categorised into two categories first, which is made in equity and second made through

debt instruments such as government bonds.

Objective of this study is to study the trend of FPI in India during the period 2012-2015 and look at

how FPI inflow is different industries/sectors

FPI is generally made when investor does not want to commit his investment for long term as he

does in FDI in which investment is made in the assets of India this is the main difference in FDI

and FPI. When Investors are looking for good returns in short term and wants liquidity of their

investment then they go for FPI.

Inflow of FPI is generally quite volatile as the investment outflow and inflow depending on various

macroeconomic parameters and speculations. In this study we would try to find any visible trend in

the inflow of FPI from 2102-2015 and analyse the changes in pattern of FPI in this period.

2. REVIEW OF LITERATURE

In this paper we would be doing trend analysis – time series of FPI inflow in India

A time series is a sequence of data points, typically consisting of successive measurements made

over a time interval. Examples of time series are ocean tides, counts of sunspots, and the daily

closing value of the Dow Jones Industrial Average. Time series are very frequently plotted via line

charts.

Time series are used in statistics, signal processing, pattern recognition, econometrics,

mathematical finance, weather forecasting, intelligent transport and trajectory forecasting,

Time series analysis comprises methods for analyzing time series data in order to extract

meaningful statistics and other characteristics of the data. Time series forecasting is the use of

a model to predict future values based on previously observed values.

3. RESEARCH OBJECTIVES

To analyse the trend of FPI during 2012-2015 and look for any visible pattern

To look at preferred recipient of FPI – Debt or Equity

To look at FPI among various major industries/sectors and change in them during the

period

To forecast the future inflow of FPI on the basis of past pattern

Look for outliers and identify reasons for that

4. TOOLS

Tool used in the study for time series analysis is – Exploratory analysis. Various techniques can

be applied under this tool to analyse time series. The clearest way to examine a regular time series

manually is with a line chart which we will use in this study.

A time series is a sequence of measurements of the same variable collected over time. Most

often, the measurements are made at regular time intervals.

5. ANALYSIS

Figure 1 Source:SEBI

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

INR

cr

ore

s

2012 2013 2014 2015

FPI inflow monthly 2012-2015

Monthly FPI/FII Net Investments (Calendar Year - 2012)

Calendar

Year

INR crores

Equity Debt Total

YEAR 2012

10357.7 15971 26328.7

February

25212 10015.7 35227.7

March 8381 -6588.5 1792.5

April -1109 -3787.7 -4896.7

May -347.3 3569.2 3221.9

June -501.3 1681.8 1180.5

July 10272.7 3391.5 13664.2

August 10803.9 264.8 11068.7

September

19261.3 622.5 19883.8

October 11364 7851.4 19215.5

November

9577.1 292.1 9869.2

December

25087.7 1704.2 26791.9

Total - 2012

128359.8

34988

163347.9

Monthly FPI/FII Net Investments (Calendar Year - 2013)

Calendar Year

INR crores

Equity Debt Total

YEAR 2013

22059 2947 25006

February

24439 4001 28440

March 9124 5795 14919

April 5414 5334 10748

May 22169 5969 28138

June -11027 -33135 -44162

July -6086 -12038 -18124

August -5922 -9773 -15695

September

13058 -5678 7379

October 15706 -13578 2128

November

8116 -5983 2133

December

16086 5290 21376

Total - 2013

113136 -

50849 62286

Monthly FPI/FII Net Investments (Calendar Year - 2014)

Calendar Year

INR crores

Equity Debt Total

YEAR 2014

714 12609 13323

February

1404 11337 12741

March 20077 11586 31663

April 9602 -9185 418

May 14006 19772 33778

June 13991 16715 30705

July 13110 22935 36046

August 5430 16704 22134

September

5103 15869 20972

October -1172 17903 16732

November

13753 11723 25476

December

1036 11188 12225

Total - 2014

97054 1591

56 256213

figure 2 source: NSDL

Above graph shows the flow of net FPI every month from 2012-2015.

Figure 3 source: NSDL

Above graph shows proportion of debt and equity in FPI in every year.

-100000

-50000

0

50000

100000

150000

200000

250000

300000

2012 2013 2014 2015

INR

CR

OR

ES

debt

equity

Monthly FPI/FII Net Investments (Calendar Year - 2015)

Calendar Year

INR crores

Equity Debt Total

YEAR 2015

12919 20769 33688

February

11476 13088 24564

March 12078 8645 20723

April 11721 3612 15333

May -5768 -8504 -14272

June -3344 1737 -1608

July 5319 4 5323

August -16877 -647 -17524

September

-6475 692 -5784

October 6650 15701 22350

November **

-5713 -2565 -8278

Total - 2015

21986 5253

2 74515

Figure 4 source: SEBI

Above graph shows the trends in debt equity during the period measured every year.

Flow of FPI Among various industries**

FPI IN INR CRORE

INDUSTRY Jan-12 Jan-13 Jan-14 Jan-15

Automobile 116 655 -96 391

financial services 4441 2763 652 1649

capital goods 2026 594 -271 1570

food,beverages,tabaco 85 -51 -192 400

oil & gas -12 322 90 560

pharma & biotech 194 915 11 1051

software & services 756 568 1075 1100

others 3299 3364 11801 26879

total 10,905 9130 13,070 33,600

Figure 5 source: NSDL

**These figures are the FPI inflow during January every year.

0

50000

100000

150000

200000

250000

300000

2012 2013 2014 2015

INP

CR

OR

ES

DEBT - EQUITY TREND IN FPI

debt

equity

Share of each industry in each year

Figure 6 source: SEBI

Automobile

1%

finacial services

41%

capital goods

18%

food,beverages,

tabaco

1% oil & gas

0%

pharm

a &

biotech

2%

software &

services

7%

others

30%

FPI in jan2012

Automobile

7%

finacial services

30%

capital goods

6%

food,beverages,

tabaco

-1%

oil & gas

4%

pharma &

biotech

10%

software &

services

6%

others

36%

FPI in jan 2013

-1%

5%

-2% -1%

1% 0%

7%

83%

FPI IN JAN 2014

Automobile

finacial services

capital goods

food,beverages,tabaco

oil & gas

pharma & biotech

software & services

others

Figure 7 source: SEBI

-1000

0

1000

2000

3000

4000

5000

Jän.12 Jän.13 Jän.14 Jän.15

FPI flow among various industry 2012-15

Automobile finacial services capital goods food,beverages,tabaco

oil & gas pharma & biotech software & services

6. Finding and Recommendations

Trend of FPI flow is quite volatile which can be interpreted from line chart (Figure 1), there

are regular spikes visible which show that there is no stable upward or downward moment

in flow of FPI. Flow of FPI is positive most of the times which means there is inflow of FPI

mostly during this period.

There is one outlier visible, during may- june 2013 there is drastic outflow of FPI as there is

outflow of INR 45000 crore as compared to inflow of INR 30000 crore in april 2013. There

would be strong influence of adverse macro economic factors or some other factor which

resulted in such shock in FPI inflow. Reason for this outflow needs to be explored.

Current trend of FPI is negative as there was outflow of INR 9000 crore. Reason for this

could be tepid demand conditions in domestic economy which resulted in poor September

quarter results of listed companies as well as week commodity prices, global slowdown and

instability in china’s economy resulted in outflow of funds from emerging markets.

Expectations of rate hike by FED reserve is also fuelling outflow of FPI from emerging

markets including India.

In 2012 and 2013 equity is preferred for Filing 2013 FPI only inflowed in equity as debt saw

outflow of FPI. Whereas in 2014 and 2015 there is reversal of trend as debt is more

preferred for FPI as compared to equity.(figure 2) Debt guarantees fixed and less risky

return to investors. However equity is risky but provides better return. Inclination of trend in

favour of debt instruments implicit that investors are not willing to take risk in Indian stock

market as they do not find return from risk adjusted return attractive from equity

instruments. (figure 3)

In 2012 and 2013 financial services which include banks and NBFCs got highest share of

FPI 41% and 30% respectively as seen (in figure 6). However in 2014 share of financial

services shrinked to mere 5%. Whereas sovereign included in others saw highest share if

FPi of INR

Amount of FPI received by each major industry during 2012-2015 could be seen in figure 5

Trend of FPI in major industries can be seen in figure 7. FPI inflow in financial services

declined for 3 consecutive years. However some recovery can be seen in 2015. Trend in

automobile sector is quite volatile.

FPI in capital goods witnessed very steep decline till it saw outflow in 2014. However it

recovered very sharply In 2015.

FPI in food, beverages and tobacco is very low in 2012-13 and outflow in 2014. It saw steep

incline in 2015.

FPI trend in oil & gas, pharma & biotech is zig zag curve with regular incline and decline

shocks.

FPI in software and services witness different and unique pattern of inflow.

7. BIBLOGRAPHY

1. The Indian Equity Market's Recent History By Pete Raine

http://marketrealist.com/2015/10/overview-last-5-years-foreign-portfolio-investment-india/

2.

Publication: The Economic Times Delhi; Date: Aug 25, 2008; Section: Political Theatre; Page: 3

Do you know the difference between FDI and FII?

http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRELzIwMDgvMDgvMjUjQXIwMDMwMA

==&Mode=HTML

3. Foreign Portfolio Investment, Stock Market and Economic Development: A Case Study of India

Parthapratim Pal

http://www.policyinnovations.org/ideas/policy_library/data/01408/_res/id=sa_File1/Partha_ACDC_

Paper.pdf

4. IMF working paper :portfolio flow into India-do fundamentals matters?

https://www.imf.org/external/pubs/ft/wp/2003/wp0320.pdf

5. Friedman, Milton. "The interpolation of time series by related series." Journal of the American

Statistical Association 57.300 (1962): 729-757.

6.Jump up^ Gandhi, Sorabh, Luca Foschini, and Subhash Suri. "Space-efficient online

approximation of time series data: Streams, amnesia, and out-of-order." Data Engineering (ICDE),

2010 IEEE 26th International Conference on. IEEE, 2010.

7. Time series at Encyclopaedia of Mathematics

https://www.encyclopediaofmath.org/index.php/Main_Page

8. Overview of Time Series Characteristics http://science.psu.edu/

9.SEBI : http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii

10. NDSL: https://www.fpi.nsdl.co.in/web/Reports/ReportsListing.aspx

11. central depository services (India) limited

https://www.cdslindia.com/publications/FIIreports.html