Foreign Portfolio Investment Flows to India: Determinants and Analysis

Summary This paper analyzes the macroeconomic determinants of portfolio flows to India and finds that lower exchange rate volatility and greater risk diversification opportunities are conducive to portfolio flows. However, higher equity returns of other emerging markets discourage these flows. Other conventional determinants of portfolio flows are domestic equity performance, exchange rate, interest rate differential and domestic output growth. An analysis of disaggregated portfolio flows shows that determinants of FIIs are similar to aggregate portfolio flows, while ADR/GDRs are significantly influenced only by domestic equity returns, exchange rate, domestic output growth, and foreign output growth.