Question

"The Indian economy has witnessed a sharp turnaround during 2023 – 24 with Foreign Direct Investments (FDI) inflows of US $ 70.9 Bn and net Foreign Portfolio Investments (FPI) inflows of US 32.4 Bn."In which account of Balance of Payments will the given variables be entered and why?

Hint:

FDI and FPI are both recorded in the Capital Account of the Balance of Payments, as they represent inflows of foreign capital.

Answer 1

Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are categorized within the Capital Account of the Balance of Payments (BoP). This account monitors all financial movements involving capital entering or leaving the country. 1. FDI:
FDI is listed under "Foreign Direct Investment" within the capital account. Due to its long-term nature, involving investments in tangible assets like acquiring business stakes or establishing production facilities, FDI is classified as a capital inflow.
2. FPI:
FPI is recorded under "Foreign Portfolio Investment" in the capital account. As FPI comprises short-term investments in financial markets, such as the acquisition of stocks and bonds, it is recognized as a potentially more volatile form of capital inflow.
In essence, both FDI and FPI are accounted for in the Capital Account as they signify financial flows into the nation, whether through direct investment or portfolio holdings.