Flows from Foreign Direct Investment (FDI) and Foreign Portfolio Investments (FPI)

Foreign capital flows to a country can be in an inactive form called Foreign Direct Investment (FDI) or a passive form called Foreign Portfolio Investment (FPI). In the case of FDIs, investing entities participate in decision-making and drive the businesses. On the other hand, as the names point out, Portfolio Investment is an investment in markets – equity or bonds by Foreign Portfolio Investors (FPIs) without 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 Numerous Paybacks, In Addition, To Bring In Capital To The Country:

·       New technologies

·       Job creation

·       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, which could create complete risk for the economy.

International Trade, Exchange Rate, And Trade Deficit

International trade indicates the total business that a country does with all other countries globally. A country's balance of payment is the report revealing transactions of a country with the rest of the world. The balance of the 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 the revenue account. Imports and exports of goods and services while the capital account impounds all capital flows like FDI, FII, loans, grants, etc.

When imports are more than exports, the country will have a current account shortfall, and if exports are more than imports, it will have current account excess. Likewise, a capital account will be in excess if inflows are more than outflows and if outflows are more than inflows on the capital account. Surplus and deficit on both current and capital accounts put jointly make it poise of a country's payment number.

If a country is running incessant shortfalls on the current account, it would need excess capital to support that or reduce its foreign currency reserves.
In either circumstance, the country runs the risk of trailing the poise of market participants as the country's currency would lose value very fast.

Currencies get traded in the world markets like commodities. The exchange rate refers to the value of one unit of a currency concerning 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 lose their value vis a vis other currencies based on the comparative strength of the countries economies.

Unemployment Rate

The unemployment rate indicates the country's appropriate and willing-to-work unemployed population in percentage conditions. During a hold back in economies, the 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 the economy going through tough times and high unemployment rates.