Foreign and Domestic Institutional Investors: A comprehensive analysis of their dynamic relationship in the Indian capital market

The 1991 liberalization policy, which introduced Foreign Institutional Investors (FIIs) to the market, to recent years, revealed a shift in the market dynamics. While FIIs have historically played a dominant role, recent years have seen increased contributions from domestic giants like mutual funds. The study employs a comprehensive methodology involving Granger causality tests and the Threshold Generalized Autoregressive Conditional Heteroskedasticity (TGARCH) model to analyze the causal relationship and impact on market volatility. The analysis covers the period from January 2017 to November 2023, utilizing data from authoritative sources like the National Stock Exchange (NSE) and the National Securities Depository Limited (NSDL). The findings reveal a bidirectional causality between Domestic Institutional Investors (DII) and FII gross sales and a unidirectional causality in gross and net purchases/sales. The results of the TGARCH model demonstrate significant impacts of negative news on volatility in various indices, with indications of a leverage effect in some cases. The study concludes that while both FIIs and DIIs influence market volatility, negative news has a larger impact on volatility than positive news of the same magnitude. The recent news impacts high on the market volatility than the historical news which is observed from the β variable values. The findings contribute to understanding the intricate dynamics of institutional investors in the Indian capital market, providing valuable insights for investors and policymakers.