Abstract

Capital inflows play a substantial role in developing countries. It used to increase accumulation and rate of investments to create conditions for more intensive economic growth. Capital inflows are necessary for macroeconomic stability as capital inflows affect a wide range of macro economic variables such as exchange rates, interest rates, foreign exchange reserves, domestic monetary conditions as well as saving and investments. Capital inflows, however, are not without risk. The main risk posed by large and volatile capital inflows is that they may resulted in crisis and destabilize macroeconomic management. Given the role of FII flews and its associated risks, the main purpose of this paper was to investigate the cointegration and causality between the Indian stock market and foreign institutional investment (FII) In India during world financial turmoil of 2008. The cointegration and causal relationship using Engle-Granger (1987), Johansen (1991, 1995a) and Granger (1969) methodologies were investigated .The study found that BSE500 stock index and FII series are cointegrated and causality between them is bilateral.

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