Ever since globalisation has swept the world, India has been poised towards prosperity. The principal contributors to this were foreign portfolio investors. Foreign portfolio investment (FPI) flow in India has unceasingly grown since 1991, which has made it an attractive hub for foreign investors and made them the dominant players. FPIs have a noteworthy impact on the Indian stock market. The interplay between FPI and stock market behaviour in India has drawn significant attention in light of growing integration between the emerging economies and global financial markets.
The study explores the evolving relationship between FPI inflows and the performance of the two prominent Indian stock indices, mainly the Sensex and NIFTY 50. The study was conducted with quarterly market data from the 1st quarter of 2010 through Q4, 2024. Applying a range of time series analytical methods, the research first scrutinises the stationary characteristics of the series, then investigates the potential causal links, and ultimately evaluates the existence of a long-term equilibrium relationship. The study employed the augmented Dickey-Fuller (ADF), the Granger causality test, VAR, and the Johansen Cointegration Test. It was found that FPI influences both Sensex and Nifty 50. FPI was found to be stationary, whereas Sensex and Nifty 50 were found to be stationary in the first lag. In the short term, FPI exerts a significant effect on 50; however, in the long run equilibrium bond between FPI and market indices remains Sensex and Nifty restricted