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

FDI and FPI are recorded in the Capital Account of the Balance of Payments (BoP). The Capital Account tracks all financial transactions related to the inflow and outflow of capital. 1. FDI:
FDI is recorded under the "Foreign Direct Investment" section of the capital account. Since FDI involves long-term investments in physical assets, such as purchasing stakes in businesses or setting up manufacturing facilities, it is considered a form of capital inflow.
2. FPI:
FPI is recorded under the "Foreign Portfolio Investment" section of the capital account. Since FPI involves short-term investments in financial markets, such as buying stocks and bonds, it is considered a form of capital inflow that can be more volatile.
In summary, both FDI and FPI are recorded in the Capital Account because they represent financial flows into the country, whether in the form of direct or portfolio investments.