Exploring Granger Causality Between FII Transactions and IPO Index Movements in India

Abstract

In the framework of India's financial sector, this paper examines the Granger causality relationship between transactions by Foreign Institutional Investors (FIIs) and Initial Public Offering (IPO) indexes. Throughout India, monthly FII transaction data covering the 12-month period from April 2011 to March 2023 is used in this analysis. To investigate the effect of FII transactions on the IPO index for various monthly lags, Granger causality was applied. For the selected data, stationarity has been determined; otherwise, false regression results could result. To construct the common base, all of the data was converted to log form. Regressing the IPO index performance from FII transactions has been done using the FMOLS (fully modified ordinary least square) technique, which is devoid of auto and serial correlation. The study's findings point to a unidirectional Granger causal relationship between FII transactions and the SME IPO Index and the BSE IPO Index. Accordingly, FII transactions may be used to forecast how the IPO indexes will perform going forward. The R-squared values, however, are somewhat low, indicating the possibility of additional factors influencing the indices. The macroeconomic environment, which includes things like inflation and interest rates, as well as the overall stock market's success, maybe some of these influences.