Foreign Portfolio Investment and Indian Sectoral Equity Returns:A Comparative Analysis of NIFTY BANK and NIFTY IT, 2012–2024

Abstract

This paper examines the differential impact of net Foreign Portfolio Investment (FPI) equity flows on two major sectoral indices of the National Stock Exchange of India—NIFTY BANK and NIFTY IT—over April 2012 to March 2024 (N = 144 monthly observations). Using OLS regression with heteroscedasticity-corrected standard errors, Johansen co-integration, Granger causality, and Vector Error Correction Modelling (VECM), the study finds that FPI flows exert a statistically significant positive effect on both indices: NIFTY BANK (β = 0.421, p < .001) and NIFTY IT (β = 0.387, p < .001). A Chow structural difference test confirms that the two sector equations are significantly distinct (F = 4.83, p < .001): NIFTY BANK returns are sensitive to INR/USD exchange rate and domestic G-Sec yield changes, while NIFTY IT returns are driven by NASDAQ returns and the U.S. Federal Funds Rate. Johansen co-integration establishes a long-run equilibrium between FPI flows and each index. Granger causality results support bi-directional causality with the flow-to-return direction more robust. VECM adjustment speeds are approximately 21% (NIFTY BANK) and 19% (NIFTY IT) per month. These findings carry actionable implications for SEBI, the Reserve Bank of India, fund managers, and domestic institutional investors.