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The widespread pecuniary crises across the globe have raised a large number of questions regarding the interdependence of economies on the financial front. The interactions and linkages of global markets amongst each other have led to drastic breakdown of the financial machinery of the economies. Foreign direct investment (FDI) and foreign institutional investment (FII) in recent years have been preferred over other sources of external finance as they are non-debt creating and non-volatile in nature. FDI and FII also facilitate international trade and transfer of knowledge, skills and technology. FIIs, which refer to capital flows across national borders, have risen sharply across the world and in India specifically since 1991. At present there exist widespread apprehensions regarding the nature and extent of FII flows to the Indian financial market. This research paper aims to analyze the relationship between the FII and market indices of the Indian stock market over a period of 10 years, that is, from 2000 to 2010. The study will also emphasize on the way forward for encouraging FII flows into the country and their impact on the economy of the country.

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