Investment Strategies of FIIs in the Indian Equity Market

In this paper, we empirically evaluate if Foreign Institutional Investors (FIIs) adopt positive feedback and herding strategies in the Indian environment. We find that FIIs exhibit return chasing behaviour when we use monthly data. However, they do not seem to be working on the positive feedback strategy when we use daily files. This may be owing to the fact that they wait for the market information to crystallize and do not react to it in an instantaneous manner. We also observe that the FIIs display strong herding behaviour based on quarterly shareholding pattern. The herding behaviour seems to be stronger at the aggregate level than at the individual stock level. This may be explained by the fact that FIIs are more cognizant of corporate fundamentals at the individual stock level. Further, the market cycle behaviour may vary from such cycles for individual stocks. Our findings have strong implications for domestic financial institutions, portfolio managers, wealth managers and other investors as well as market regulators who wish to have better understanding of FII.s behaviour as the later are the dominant investors in the Indian equity market.