8th July 2024 (11 Topics)

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Foreign Portfolio Investment (FPI)

Context

Indian equity has been attracting FPI inflows

About:

Foreign portfolio investment (FPI) involves holding financial assets from a country outside of the investor's own.
FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange traded funds.
Along with foreign direct investment (FDI), FPI is one of the common ways for investors to participate in an overseas economy, especially retail investors.
Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.

Benefits of FPIs?

Inflow of foreign currency: More FPIs increases the inflow of foreign currencies in the country, positively impacting the balance of Payment of the nation.
Surplus Balance of Payment: More dollar in the forex reserve increase strengthens the balance of payment situation.
Appreciation of currency: Supply of dollar in the economy limits the downfall of rupee and increases the value of rupee with respect to foreign currency.
Increase in Import cover: Availability of forex reserve at surplus position makes the country’s import cover stronger, essential for import dependent country like India.
Reduction in Import Bill: Appreciated currency or a stronger rupee reduces the burden of out shelling of funds on imports.

Risk associated with the FPI?

Easy way of entry and exit: FPIs are volatile in nature, with a barrier free entry and exit method, creating a fluctuation in the Indian market.
Short term investment: Due to negligible barrier for movement, there remains a scope for volatility in the investment.
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.
Forex stress: Repayment of the investment money in dollar terms increases the burden on the forex reserve of the country.
Depreciation of rupee: Sudden dumping of FPIs in the economy reduces the value of local currency with respect to dollars.
Increase in Import bills: With a weaker rupee, India has to shell out more fund for the same amount of goods, widening the scope for imported inflation.
Balance of Payment crisis: Increasing import bills and decline in foreign investment leads to outflow of dollars from the economy, creating a potential threat to the Balance of Payment.

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Foreign Portfolio Investment (FPI)

About:

Benefits of FPIs?

Risk associated with the FPI?

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