Do Flow of FDI and Stock Index Movements Corroborate Long-term Relationship?
An Empirical Analysis of India
The study corroborates the dynamic relationship between foreign direct investment (FDI) and the Bombay Stock Exchange (BSE) during the period 2000-2016 using monthly data collected through secondary sources. The time series data were found to be stationary at first difference and were integrated of order I(1). The results confirmed the presence of long-term relationship between FDI and the BSE. The error correction mechanism restores equilibrium whenever disequilibrium takes place between the variables. The vector error correction model (VECM) results indicate that it is the BSE that corrects the disequilibrium in the long-term relationship with FDI. The analysis also revealed the presence of shortrun relationship between variables and the relationship, and it appears to be unidirectional. BSE granger causes FDI. Using the variance decomposition index and impulse response function,it is found that there is significant and higher response of FDI to the shocks in BSE thereby concluding that any new information about the economy/markets is first captured by the BSE, which in turn corrects the flow of FDI in India. The study thus partially supports the complementary hypothesis
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