Q) What is FPI? What is the impact of FPI dumping stock markets on Indian economy?
Answer– Investment in financial assets of a foreign nation, such as stocks or bonds listed on an exchange, is known as foreign portfolio
It is a common way to invest in overseas economies. It includes securities and financial assets held by investors in another country.
Securities (in FPI) include stocks or American Depositary Receipts (ADRs) of companies in nations other than the investor’s nation.
FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy. FPI is more liquid,
volatile and therefore riskier than FDI.
Significance of FPI:
• Accessibility to International Credit:
• Promotes the Development of Equity Markets:
• Helps companies raise significant capital without incurring massive expenses.
FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).
Reasons for FPI dumping Indian stock market–
➢ Slow pace of recovery after covid pandemic
➢ Rise in food inflation due to Russia–Ukraine conflict–
➢ Increase in inflation–Increase cost of production–profit of companies reduces–less incentives to invest
➢ Increase in interest rate by USA Fed
Impact of dumping of Indian economy–
❖ Depreciation in Rupee
❖ Increases import bill
❖ Travellers and students studying abroad will have to shell out more rupees to buy dollars from banks.
❖ Fall in Indian Forex reserve
❖ Hot money: Frequent inflow and out flow of dollar, increases the risk of currency volatility in the exchange rate market,
further having a prolonged impact in the stock market and profitability of the domestic investors.
Foreign Portfolio Investment has a significant share in the Balance of Payment of India, thus, becomes a deciding factor for India’s share
in world economy. Sudden decline in FPIs provides a severe stress in the exchange rate market further creating a domino effect in the
stock market and inflation in the economy