The correlation of returns between Indian equity indices and a host of other markets are rising and close to high. We concluded that global factors are driving the market much more than idiosyncratic India factors. We see the same story when we measure the beta of the Sensex to
FII flows.
Market participants believe that FII flows are important to the market. However, the correlation between short-term returns and FII flows is weak. The correlation happens to be strong only for longer-term returns, i.e., 12-month returns to be more specific. Indeed, these correlations also vary over time. Thus, FII flows have changeable efficacy on market moves.
