Effect of the U.S. quantitative easing policy on institutional investor flows of an emerging country

Figures & data

Table 1. Overview of the Indian Capital Markets (National Stock Exchange of India)

(FY)	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
Market capitalization (INR bn)	33,674	48,581	28,962	60,092	67,026	60,965	62,390	72,777	99,301	93,105	119,784
P/E ratio of Nifty 50	18.4	20.6	14.3	22.3	22.1	18.7	17.6	18.9	22.7	20.9	23.3
Average Nifty 50 index	3,572	4,897	3,731	4,658	5,584	5,243	5,520	6,010	7,967	7,984	8,421
Annualised Volatility (percent)	28.0	32.1	41.5	29.4	21.4	20.4	12.9	18.1	13.5	17.1	12.3

This table presents an overview of Indian capital markets over our study period. Source: NSE annual reports, NSE official website.

Overview of NSE

Table 2. Net FII and net DII investment flows in India

Year	Obs	dii_net	fii_net
Panel A: Institutional investor flow by year
Apr-Dec 2007	180	243.54	−54.29
2008	246	729.67	−1,018.03
2009	241	261.06	248.20
2010	244	−188.71	610.80
2011	245	274.89	−232.74
2012	238	−558.00	1,011.66
2013	246	−730.52	871.05
2014	240	−292.42	706.44
2015	239	629.21	−152.32
2016	242	339.17	−85.64
Jan-May 2017	101	145.68	261.96
Panel B: Institutional investor flow by sub-period
Sub-period	Obs	dii_net	fii_net
PreQE	401	940.52	−1024.09
During QE	1230	−893.00	2448.67
Post QE	831	806.07	791.37

This table shows the net FII and net DII investment over the study period. Net flows have been calculated as daily gross purchase minus daily gross sale by investors. All amounts in INR billion. Obs is number of days.

Table 3. Descriptive statistics

	(percent)	(INR billion)
	Indexret	fii_net	dii_net
Mean	0.039	0.35	0.90
Median	0.00	0.18	0.83
Std. Dev.	1.51	5.59	9.52
Skewness	0.411	−0.13	3.44
Kurtosis	15.32	11.27	56.43
Observations	2,462	2,462	2,462

This table presents the descriptive statistics for the data. The data represents daily returns in percent on the NSE Nifty index and fii_net and dii_net are daily net FII and net DII flows. FII flows are combined FII/FPI trading data across NSE, BSE and MSEI collated on the basis of trades executed by FIIs/FPIs. DII flows is the trading data across NSE, BSE and MSEI collated on the basis of trades executed by Banks, DFIs, Insurance, MFs and New Pension System. Net FII and DII are calculated as daily gross purchase minus daily gross sale by investors. (Source: NSE and author calculations)

Table 4. Correlation analysis

Panel A: Full period
	indexret	fii_net	dii_net
indexret	1.00
fii_net	0.32	1.00
dii_net	− 0.15	−0.62	1.00
Panel B: Sub-periods
Pre QE	indexret	fii_net	dii_net
indexret	1.00
fii_net	0.47	1.00
dii_net	−0.30	−0.69	1.00
During QE	indexret	fii_net	dii_net
indexret	1.00
fii_net	0.35	1.00
dii_net	−0.13	−0.64	1.00
Post QE	indexret	fii_net	dii_net
indexret	1.00
fii_net	0.24	1.00
dii_net	−0.10	−0.56	1.00

The table presents the correlation between index returns, net FII and net DII flows over the period of analysis.

Figure 1. Net FII and net DII investment flows in India

This figure shows the daily net FII and net DII investment flows from 2007–2017. We have marked the event study window to help analyze the change in trends. The figure indicates a negative correlation between net FII flows and net DII flows. (Source: National Stock Exchange of India, author calculation)

Table 5. Test of Granger causality between returns and flows using U.S. QE event window

Panel A: Sub-period analysis
Hypothesis	Full period		Pre QE		During QE		Post QE
indexret does not Granger Cause Δdii_net	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null
Δdii_net does not Granger Cause indexret	0.24	Accept null	0.06**	Reject null	0.47	Accept null	0.93	Accept null
indexret does not Granger Cause Δfii_net	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null
Δfii_net does not Granger Cause indexret	0.20	Accept null	0.35	Accept null	0.19	Accept null	0.00*	Reject null
indexret does not Granger Cause Δaii_net	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null	0.09	Accept null
Δaii_net does not Granger Cause indexret	0.39	Accept null	0.34	Accept null	0.47	Accept null	0.00*	Reject null
Panel B: QE1, QE2 and QE3
Hypothesis	During QE		QE1		QE2		QE3
indexret does not Granger Cause Δdii_net	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null	0.01*	Reject null
Δdii_net does not Granger Cause indexret	0.47	Accept null	0.80	Accept null	0.90	Accept null	0.09	Accept null
indexret does not Granger Cause Δfii_net	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null	0.01*	Reject null
Δfii_net does not Granger Cause indexret	0.19	Accept null	0.12	Accept null	0.30	Accept null	0.79	Accept null
indexret does not Granger Cause Δaii_net	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null
Δaii_net does not Granger Cause indexret	0.47	Accept null	0.22	Accept null	0.15	Accept null	0.75	Accept null

Panel A explores the causality between index returns and institutional investor flows using U.S. QE event windows. Panel B explores the impact of announcement of QE1, QE2 and QE3. Indexret is the daily index returns for NSE Nifty. We use first difference for capital flow variables. Δdii_net, Δfii_net and Δaii_net are first difference of daily net purchases of DIIs, FIIs, and AIIs respectively. More information on the variables is available in Appendix 1. The values denote the probability of the test statistic in the Granger Causality tests. * and ** indicates the presence of causality at 5 percent and 6 percent LOS respectively.

Table 6. Test of Granger causality between returns and flows using global financial crisis event window

Hypothesis	Full period		Before crisis		During crisis		Post crisis
indexret does not Granger Cause Δdii_net	0.00*	Reject null	0.00*	Reject null	0.25	Reject null	0.00*	Reject null
Δdii_net does not Granger Cause indexret	0.24	Accept null	0.03*	Reject null	0.66	Accept null	0.85	Accept null
indexret does not Granger Cause Δfii_net	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null	0.00*	Reject null
Δfii_net does not Granger Cause indexret	0.20	Accept null	0.13	Accept null	0.63	Accept null	0.29	Accept null
indexret does not Granger Cause Δaii_net	0.00*	Reject null	0.01*	Reject null	0.00*	Reject null	0.00*	Reject null
Δaii_net does not Granger Cause indexret	0.39	Accept null	0.23	Accept null	0.71	Accept null	0.34	Accept null

The table explores the causality between index returns and institutional investor flows using global financial crisis event windows. Indexret is the daily index returns for NSE Nifty. Variables Δdii_net, Δfii_net and Δaii_net are first difference of daily net purchases of DIIs, FIIs, and AIIs respectively. More information on the variables is available in Appendix 1. The values denote the probability of the test statistic in the Granger Causality tests. * indicates the presence of causality at 5 percent LOS.

Table

Variable	Definition	Source
indexret	Daily NSE Nifty index returns. NIFTY is a diversified 50 stock index accounting for 13 sectors of the Indian economy. Daily index returns calculated as (P1-P0)/P0	NSE official website
fii_net	Daily net investment made by foreign institutional investors calculated as gross purchases minus gross sales. The data includes all the activities such as trades done in the secondary market, primary market and activities involved in right/bonus issues, private placement and merger & acquisition. Δfii_net is the first difference of fii_net.	NSE official website
dii_net	Daily net investment made by domestic institutional investors calculated as gross purchases minus gross sales. The data includes all the activities such as trades done in the secondary market, primary market and activities involved in right/bonus issues, private placement and merger & acquisition. Δdii_net is the first difference of dii_net.	NSE official website
aii_net	Sum of fii_net and dii_net. Δaii_net is the first difference of aii_net.	NSE official website and author calculations

Table

Event	Date	Event description
1	8 October 2008	Eight central banks including the U.S. Federal Reserve, Bank of England and the European Central Bank cut their interest rates by 0.5 percent in a coordinated attempt to ease the pressure on borrowers.
2	24 November 2008	U.S. Federal Reserve initiated a program to purchase the direct obligations of housing-related government-sponsored enterprises- Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae up to USD 100 bn
3	3 November 2010	Announcement of the second round of monetary stimulus
4	13 September 2012	Announcement of third round of monetary stimulus
5	18 December 2013	U.S. Federal Reserve announced that it has decided to modestly reduce the pace of its asset purchases marking the end of the Quantitative Easing program.
6	29 October 2014	Halt of purchase of bonds by the U.S Federal Reserve

Table

	Period	Rationale
Pre U.S. QE	16 April 2007 to 24 November 2008	Period before the announcement of QE in the U.S.
During U.S. QE	25 November 2008 to 18 December 2013	Duration of QE in the U.S.
Post U.S. QE	19 December 2013 to 31 May 2017	Period post the announcement for reduction of QE in the U.S. (serving as a strong signal for change in policies)

Table

Event	Date	Particulars
1	9 August 2007	BNP Paribas acknowledged the risk of exposure to the sub-prime mortgage market
2	17 February 2008	UK nationalized Northern Rock which faced liquidity crisis due to overexposure to securitized mortgages
3	7 September 2008	The U.S. government bailed out Fannie Mae and Freddie Mac two huge firms that had guaranteed thousands of sub-prime mortgages. This was one of the largest bailouts in U.S. history.
4	15 September 2008	Lehman Brothers filed for bankruptcy
5	14 November 2008	G20 leaders meet at Pittsburgh
6	2 April 2009	The G20 agreed on a global stimulus package worth USD 5 tn, indicating the revival stage of the global financial crisis
7	2010-2011	Greece, Ireland and Portugal are bailed out
8	26 July 2012	ECB president Mario Draghi, gave his strong defense of the Euro, prompting markets to rally

Table

	Period	Rationale
Pre-crisis window	16 April 2007 to 6 September 2008	The bailouts served as an acknowledgment of the failure of the financial systems leading to global panic
During crisis window	7 September 2008 to 2 April 2009	Period from the bailout to the G20 global stimulus package announcement
Post crisis window	3 April 2009 to 31 May 2017	Marks the revival and stabilization period of the economies worldwide