Foreign capital flows to a country can be either in active form called as Foreign Direct Investment (FDI) or passive form called as Foreign Portfolio Investment (FPI). In case of FDIs, investing entities participate in decision making and drive the businesses. On the other hand, Portfolio Investment, as names points out is investment in markets – equity or bonds by the Foreign Portfolio Investors (FPIs) without any management participation. There are upper limits on the individual and combined holding by FPIs in the paid up capital of the Indian companies.
FDI is greeted by all the developing economies and has numerouspaybacks in addition to bring in capital to the country:
New products and services
New managerial skills
As FDI is long term in nature and steady money, FPIs money is measured as hot money as they can pull out the money at any time which could create complete risk for the economy.
International Trade, Exchange Rate and Trade Deficit
International trade indicates to the total business that a country does with all other countries in the world. A country’s balance of payment is the report revealing transactions of a country with the rest of the world.
Balance of payment report is generally divided into two accounts namely the current account and the capital account. The current account has all the particulars of transactions on revenue account. Imports and exports of goods and services while the capital account impound all the capital flows like FDI, FII, loans, and grants etc.
When imports are more than exports, then country will have a current account shortfall and if exports are more than imports then it will have current account excess. Likewise, capital account will be in excess if inflows are more than outflows and in shortfall if outflows are more than inflows on capital account. Surplus and/or deficit on both current and capital accounts put jointly makes it poise of payment number for a country.
If a country is running incessant shortfall on current account, it would need excess on capital account to support that or reduce its foreign currency reserves.
In either circumstance, the country runs the risk of trailing poise of market participants in the country as the currency of the country would lose value very fast.
Currencies get traded in the world markets like commodities. Exchange rate refers to the value of one unit of a currency with respect to other currency/currencies. For instance, if Indian Rupee is excerpt alongside the dollar as $/Rs. 65, it means one dollar is priced at Rs. 65. Currencies can become more expensive and/or lose their value vis a vis other currency based on the comparative strength of the countries’ economy.
Unemployment rate indicates the appropriate and willing to work unemployed population of the country in percentage conditions. During a hold back in economies, unemployment rate rises and during an expansion phase, the unemployment rate drops as more jobs are generated as supply goes up. Higher employment means income, which recovers the ability of people to spend, which entails potential growth in the economy. The repeal would be true for economy going through tough times and high unemployment rates.