Relevance: GS III (Economy – Capital Markets) | Source: The Hindu Business Line
1. The Human Context: A Sudden Good-Bye
In January 2026, the Indian stock market saw a massive exit. Foreign investors packed their bags, pulling out ₹35,962 crore in just one month—the highest in five months.
The Term: This is classic “Hot Money” behavior. Unlike a factory owner who stays for years, these investors are here for quick returns and leave the moment they smell risk.
The Source: Interestingly, the selling wasn’t global; it was concentrated in funds based in Japan and Luxembourg.
2. Why are they Leaving?
Three simple reasons explain why foreign investors are nervous:
- Disappointing Results: Indian companies didn’t earn as much profit in the last quarter (Q3) as expected.
- Currency Trouble: The Rupee is weakening. If a foreign investor earns ₹100, but the Rupee drops in value, that ₹100 buys fewer Dollars when they go home. It eats into their profit.
- Greener Pastures: Other markets (like China or Brazil) are currently “cheaper” to buy into, so money is shifting there for better bargains.
3. The Indian Shield (Shock Absorber)
Despite this massive exit, the market didn’t crash. Why?
Local Heroes: While foreigners sold, Indian Mutual Funds bought heavily.
The Shift: This shows that Indian household savings (your SIPs) are now strong enough to act as a “Shock Absorber,” protecting the economy from global volatility.
UPSC Value Box
| Concept / Term | Relevance for Prelims |
|---|---|
| “Hot Money” | Capital that moves very quickly between countries to take advantage of short-term interest rate differences or expected exchange rate shifts. It is highly volatile. |
| FDI vs. FPI | FDI (Foreign Direct Investment): Long-term, builds assets, brings technology, gives management control. FPI (Foreign Portfolio Investment): Short-term, buys shares/bonds, gives no control (holding usually capped <10%). |
| Capital Account | FPI flows are recorded in the Capital Account of the Balance of Payments (BoP). High outflows can weaken the Rupee. |
Question
Q. With reference to foreign investment in India, what is the primary difference between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?
- FDI helps in technology transfer, whereas FPI is only about capital infusion.
- FDI targets specific sectors, whereas FPI is restricted to the manufacturing sector.
- FDI involves a long-term interest and management control in the company, whereas FPI does not.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 1 and 3 only
- (c) 2 and 3 only
- (d) 1, 2 and 3
Correct Answer: (b)
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