The Indian stock market has become a hotspot for attracting investment from foreign portfolio investors. They are contributing to India’s economic growth and play a key role in bringing economic stability to the country. That is the reason FPIs are considered the most influential investor category in the capital market, as they help in improving market efficiency. The FPI investment inflows have the potential to improve the economic development of India by influencing the macroeconomic factors of the country. They look for countries with strong economic growth for investment purposes. However, the flow may get dulled due to better equity returns of other developing markets.
The Present study is done to analyse the causal relationships between FPI and key macroeconomic indicators (GDP, CPI, and REER) and to evaluate the dynamic interactions among FPI and macroeconomic variables. Time series quarterly data were used from 2010 Q1 to 2024 Q4. The study used the augmented Dickey-Fuller (ADF), the Granger causality test, VAR, and the Johansen Cointegration Test. It was found that REER influences FPI, whereas GDP and Inflation did not. FPI was found to be stationary, whereas GDP, CPI, and REER were stationary in the first lag. REER affected FPI in the short run, whereas there was weak evidence of a long- run equilibrium relationship between FPI, GDP and CPI.
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