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Q107 (CDS-II/2016) Economy › External Sector & Trade › External capital flows Answer Verified

In India, the term ‘hot money’ is used to refer to

Result
Your answer: —  ·  Correct: D
Explanation

In the Indian economic context, 'hot money' refers to Foreign Portfolio Investment (FPI). It represents capital that flows into the country to earn short-term profits from interest rate differentials or anticipated exchange rate movements. Unlike Foreign Direct Investment (FDI), which is long-term and involves physical assets or significant management control, FPI is highly liquid and volatile [3]. FPI involves investments in financial instruments like shares and bonds, which can be quickly liquidated and withdrawn, potentially leading to market instability. Historically, Foreign Institutional Investors (FIIs), a subset of FPI, have been specifically labeled as 'hot money' due to their short-term nature and tendency to shift rapidly between global markets in search of higher returns. This volatility requires the RBI to manage inflows and outflows to maintain exchange rate stability.

Sources

  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > a. Foreign Institutional Investment (FII) > p. 477
  2. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 99
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