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FLOWS FROM FOREIGN DIRECT INVESTMENTS (FDI) VERSUS THE FLOWS FROM FOREIGN PORTFOLIO INVESTMENTS (FPI)

Foreign capital flows to a country can be either in active form known as Foreign Direct Investment (FDI) or passive form known as Foreign Portfolio Investment (FPI). In case of FDIs, investing entities participate in decision making and drive the businesses. However, Portfolio Investment, as name indicates 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 welcomed by all the developing economies and has multiple benefits in addition to bring in capital to the country: 
  • Job creation 
  • New technologies 
  • New managerial skills 
  • New products and services   
While FDI is long term in nature and stable money, FPIs money is considered as hot money as they can pull out the money at any time which could create systemic risk for the economy.

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