India liberalized its financial markets by opening its doors to foreign institutional investors in September, 1992. We study this landmark event, by examining the impact of trading of Foreign Institutional Investors on the major stock indices of India. First, we find that unexpected flows have a greater impact than expected flows on stock indices. Second, we find strong evidence consistent with the base-broadening hypothesis. Third, we do not find any evidence that foreign institutional investors employ either momentum or contrarian strategies. Fourth, our findings support the price pressure hypothesis. Finally, the claim that foreigners’ destabilize the market is not substantiated.
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