Determinants of Foreign Portfolio Investment Decline in India: A SARIMAX-Based Time Series Analysis (1984-2014)

Abstract

India has been an attractive destination for parking foreign funds for many decades due to its large market and promising high potential, and it has attracted significant FDI and FPI over the last decade. But recently, there has been a noticeable decline in FPI inflows despite economic growth and India being the fourth-largest economy in the world by nominal GDP. The motivation of our study was to find out the reason behind this shift in the attitude of investors. The objective of the study was to investigate why India is losing its attractiveness as a destination for foreign portfolio investment and FDI, and also to identify the economic and financial determinants impacting these.

We have used a SARIMAX model as our methodology, using data from 1984 to 2014, and included both economic and financial indicators like GDP, inflation, tax structure, energy use, trade openness, SDR rates, etc. The findings of our research were that GDP, trade openness, stock market returns, and energy use have a positive and statistically significant impact on FDI inflows. Variables like taxation structure and SDR rates have a negative and statistically significant impact, and FPI net inflows remain statistically insignificant in influencing long-term FDI.

Through this research paper, we aim to fill a gap in literature by focusing on long-term FDI trends and their determinants, and offer a few policy suggestions to improve India’s investment climate and regain foreign investor trust,  again making India the most favourable destination for foreign funds