FPIs’ Market Exit

With the USA’s liquidity tapering measures, the capital outflow from the capital market has unnerved the stock market and led to weakening of the rupee.

What are 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, increasing the import cover of the nation.
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, reducing the burden of import bills.

What are the risk associated with the FPI?

Volatile in nature: FPIs and FIIs are highly volatile in nature, poses a potential threat to the exchange rate and stock market of the nation, as the investment period varies with market condition.
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, lowering the value of domestic currency.

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