Taking Stock of Foreign Institutional Investors

Institutional investors have grown in importance in the mature economies in recent years and come to supplant banks as the primary custodians of people?s savings. Flows of private capital through FIIs have in recent years augmented forex reserves in emerging markets. In India, over the past decade FIIs have displaced domestic mutual funds in importance in the equity market. Their shareholding in the Sensex companies is large enough for them to be able to move the market. The volatility in portfolio inflows to India has been modest compared to other emerging markets. As domestic funds grow in size and pension funds enter the equity market, that would provide a measure of self-insurance against volatility occasioned by FII flows. The real problem caused by variations in FII inflows from year to year is not stock market volatility but difficulties posed in management of money supply and the exchange rate.