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    Question

    In the context of Indian Economy, consider the following statements about Foreign Portfolio Investment (FPI)?

    I. It consists of securities and other financial assets passively held by foreign investors.

    II. It provides the investor with direct ownership of financial assets.

    III. FPI is less liquid and riskier than Foreign Direct Investment (FDI).

    Which of the above statements is/are correct?

    A I only Correct Answer Incorrect Answer
    B I and III only Correct Answer Incorrect Answer
    C II and III only Correct Answer Incorrect Answer
    D I, II and III only Correct Answer Incorrect Answer
    E I and II only Correct Answer Incorrect Answer

    Solution

    Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market. FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP). FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy. FPI is more liquid and riskier than Foreign Direct Investment (FDI).

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