INTRODUCTION



Since the liberalization in 1992-93 FIIs have played an imperative role in shaping our Indian economy. As we are growing, we now have a symbiotic relationship with the FIIs. The FIIs invest in our equity market because we are a second most fastest growing economy and our equity market is outperforming because FIIs are the major investors which are attracted. After the setback of Sub-prime crisis, Lehman brothers’ bankruptcy, and crash in the Indian market in January 2008, two and a half years from then on 21st September 2010 Nifty has once again crossed the 6k level and Sensex breached 20k level. Indian equity markets are again confident as FIIs have invested heavily in the past few weeks, specifically in September. There are many reasons why FIIs are investing heavily in Indian equity markets. They do so because we have the ability to produce goods and provide services at a lower cost also the Indian companies have tremendous growth potential inside as well outside India. The mergers and acquisitions of the MNCs by the Indian companies in recent, has proved our mettle to the world. The population of India signifies that we have never ending demand unlike developed countries where the demand is less than the supply. The purchasing power of Indian consumers has also increased during the past few years.

Quantitative Easing

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect.
For example, in introducing its QE program, the Bank of England bought gilts from financial institutions, along with a smaller amount of relatively high-quality debt issued by private companies. The banks, insurance companies and pension funds can then use the money they have received for lending or even to buy back more bonds from the bank. The central bank can also lend the new money to private banks or buy assets from banks in exchange for currency. These have the effect of depressing interest yields on government bonds and similar investments, making it cheaper for business to raise capital. Another side effect is that investors will switch to other investments, such as shares, boosting their price and thus creating the illusion of increasing wealth in the economy.

Effect of QE (II) By Federal Reserve on Indian Equity Market
It has a very crucial effect on Indian equity markets as second quantitative easing would yield positive results for the Indian stock market. As we mentioned earlier, India is amongst the best performing markets and a hot spot for FIIs to invest money. FIIs have also started taking positions before the stock prices move up. This has helped Nifty and Sensex to breach the level of 6000 and 20000 respectively. And now with all the festivities coming up it is expected that this level may sustain and we can soon see Sensex at 21k level.