05-12-2024
06:43 AM
Prelims: Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.
Mains: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Foreign Portfolio Investment (FPI) plays a vital role in the financial markets by allowing foreign investors to participate in a country’s economic growth without directly influencing or controlling businesses. It mainly focuses on short-term investments in financial assets like stocks, bonds, and other securities, offering opportunities for capital appreciation and risk diversification.
While FPI contributes to economic growth by boosting investments, it also presents challenges, such as market volatility and susceptibility to external financial shocks. Despite its transient nature, FPI remains an essential tool for accessing global markets and diversifying investment portfolios across emerging economies.
Foreign Portfolio Investment (FPI) refers to investments made by foreign entities in the financial assets of a country, such as stocks, bonds, or other securities. Unlike Foreign Direct Investment (FDI), which involves acquiring a controlling stake in a business, FPI is more passive and typically involves a short-term investment horizon. The primary goal of FPI is capital appreciation and access to a diversified portfolio of financial assets.
Foreign Institutional Investors (FIIs) are a subset of Foreign Portfolio Investment (FPI) and refer to investment firms or entities, such as mutual funds, pension funds, insurance companies, and hedge funds, that invest in a country's financial markets. While FPI includes all foreign investments in financial assets, including individual investors, FIIs specifically refer to institutional investors, often involving a more strategic and structured approach compared to individual investors. Thus, while all FIIs are considered FPIs, not all FPIs are FIIs.
Foreign Portfolio Investment (FPI) plays a crucial role in the financial ecosystem of emerging economies like India. By enabling foreign investors to participate in the financial markets, FPI helps in channelling substantial capital into the economy. This capital infusion not only provides liquidity to the markets but also promotes the development of more dynamic and efficient capital markets. The significance of FPI includes:
Despite its numerous advantages, Foreign Portfolio Investment (FPI) comes with several challenges and risks. The primary concern lies in the volatility that often accompanies FPI inflows and outflows, which can lead to instability in the financial markets. The key issues associated with FPI are:
While both Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) involve foreign capital inflows, they differ fundamentally in their nature and impact on the economy. The key differences include:
Q1. What is a Foreign Portfolio Investment?
Ans. Foreign Portfolio Investment (FPI) refers to investments made by foreign entities in a country’s financial markets, such as stocks, bonds, or other securities, without taking a controlling interest in any company.
Q2. What is the difference between FPI and FDI?
Ans. FPI involves passive investment in financial assets like stocks and bonds, with no control over the companies. In contrast, FDI involves long-term investment in a company, usually with significant ownership and control.
Q3. What are the benefits of FPI?
Ans. FPI brings capital inflows, enhances market liquidity, supports economic growth, improves market efficiency, and provides opportunities for risk diversification for investors.
Q4. Is FPI a current or capital account?
Ans. FPI is recorded under the capital account of the balance of payments, as it involves cross-border investments in financial assets.
Q5. Are FPI registered with SEBI?
Ans. Yes, FPIs must be registered with the Securities and Exchange Board of India (SEBI) before they can invest in Indian financial markets.
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