InvestorQ : How do capital flows impact the value of the rupee?
Riya Dwivedi made post

How do capital flows impact the value of the rupee?

rhea Babu answered.
3 years ago

Capital flows from abroad are of two types; FDI flows and FPI flows. Foreign direct investment (FDI) has been termed as stable money while FPI flows are referred to as hot money. That is because FPI flows are portfolio flows and can reverse direction at short notice. We saw a huge equity sell-off in 2008 and a massive debt sell-off by FPIs in 2013. In both these situations, the INR value cracked sharply. Interestingly, over the last 2 years, India has emerged as the largest annual recipient of FDI investments and that has given a higher degree of stability to the INR. Capital flows normally are responsible for sharp movements in the INR. Normally, capital outflows tend to have a domino effect on the rupee and the markets. More selling leads to more demand for dollars and leads to weakening of the rupee. The weakening of the rupee, in turn, leads to more selling as FPIs want to guard themselves against currency depreciation eating into their portfolio returns. While the INR is not freely tradeable in global markets, many other economies like Russia, Malaysia, Thailand and Singapore have seen this domino effect playing out quite rapidly when speculators combine with sellers.