Trading behaviour of Institutional investor in Indian stock market

Abstract

Institutional investors are key players in financial markets, executing large-scale and frequent trades that comprise a major portion of total market activity. Their substantial market presence allows them to have a major impact on stock prices and market indices through their purchasing and selling activity. Foreign institutional investors, by channeling capital into a country’s markets, enhance liquidity, promote financial innovation, and support integration with the global financial system. In contrast, domestic institutional investors act as internal stabilizing forces, with their investment strategies significantly shaping market dynamics and influencing investor confidence. The study seeks to analyze trends of institutional investors in the Indian stock market. It also aims to examine the impact of their trading behaviour on stock indices returns and stock market index volatility. Additionally, the study investigates the relationship between institutional investors’ trading behaviour and stock indices movements, and assesses the influence of macroeconomic variables on the investment behaviour of institutional investors. Financial data for this study are sourced from secondary sources, including Money Control, the National Stock Exchange, the Reserve Bank of India, and the Federal Reserve Economic Data. The compiled data are subsequently analyzed using statistical and econometric techniques to extract meaningful insights. The research design employed in this study is descriptive and analytical. Descriptive research follows comparative and correlational methods to yield useful results, while the analytical design utilizes existing facts and figures to conduct a critical evaluation. The research spans a considerable timeframe, focusing on recent years to ensure relevance and depth. Specifically, it examines the period from 2011 to 2020. The sample includes daily trading data on institutional investors and stock market indicators, along with monthly data on key macroeconomic variables such as interest rates, inflation, exchange rates, and GDP. Empirical analysis demonstrates the statistically significant impact of institutional investors on stock indices returns in the Indian economy. Although their behaviour exhibits predictive power, the historical momentum of the indices remains the primary driver of the fluctuations. The study also indicates that foreign and domestic institutional investors have a significant impact on the stock market index volatility. Foreign investors exert a negative impact while domestic Investors have a positive impact. In the short run, they adopt momentum trading strategies (knee–jerk reaction to market information, buy-low sell-high) and in the long run, follow value trading strategies (investing in stocks trading for less than their book value). The study introduces a novel perspective by examining how macroeconomic variables influence the investment behaviour of institutional investors. For foreign institutional investors, GDP and inflation emerge as the significant determinants, iv indicating a preference for investing in a growing economy and during inflationary periods, possibly due to the inflation-hedging nature of equities. However, the exchange rate does not show a statistically significant effect. In contrast, domestic institutional investors respond differently, with inflation and interest rates exerting a discouraging effect, consistent with risk-averse strategies during periods of economic uncertainty. GDP negatively influences the domestic institutional investor’s indicating intentional portfolio reallocation strategies. The study offers valuable insights for policymakers, investors, start-up companies, and growth-oriented organizations. The findings can also meaningfully contribute to the existing literature and identify the areas that require future research.