Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Q5. Identify the factors driving Foreign Portfolio Investor withdrawals from Indian financial markets in recent times. Examine their impact on the stock market and exchange rate. Suggest policy measures to stabilise capital flows. (15 M)
Difficulty Level: Medium
Reference: IE
Why the question
Recent geopolitical tensions in West Asia, rising crude oil prices, and global financial volatility have triggered significant Foreign Portfolio Investor (FPI) outflows from Indian financial markets. These developments have raised concerns about stock market stability, capital flows and depreciation of the Indian rupee, making it an important issue in India’s macroeconomic management.
Key Demand of the question
The question requires identifying the major factors responsible for recent FPI withdrawals from Indian financial markets. It also demands examining their impact on the stock market and exchange rate, and suggesting policy measures to stabilise capital flows.
Structure of the Answer
Introduction
Briefly highlight the importance of foreign portfolio investment in India’s capital markets and its sensitivity to global financial cycles and geopolitical shocks.
Body
- Factors driving FPI withdrawals: Mention global risk aversion, geopolitical tensions, oil price shocks, currency depreciation risks and shifts in global monetary policy influencing foreign investor behaviour.
- Impact on stock market and exchange rate: Indicate how FPI outflows can trigger equity market volatility and depreciation pressure on the Indian rupee.
- Policy measures to stabilise capital flows: Suggest strengthening macroeconomic fundamentals, maintaining adequate foreign exchange reserves, deepening domestic financial markets and reducing external sector vulnerabilities.
Conclusion
Emphasise the need for resilient macroeconomic policies and diversified capital inflows to manage volatility in global capital movements.
