FPI (Foreign Portfolio Investment)

What is FPI (Foreign Portfolio Investment)?

Foreign Portfolio Investment, otherwise referred to as FPI, refers to investments placed by foreigners in other countries' financial assets, for example, stocks, bonds, or mutual funds. The investment is somehow different from Foreign Direct Investment (FDI) since it's not owned and actively run.

Major Features of FPI

• Passive Investment: Investors have no influence or actual control over companies and firms where their money is invested.
• Short Term Focus: Often created to generate short-term returns from market volatility.
• High Liquidity: Highly tradable financial assets make FPI highly liquid.

Benefits of FPI

1. Capital Flows: Brings in additional capital to the capital markets of a host country.
2. Market Deepening: There is an increase in liquidity and market development.
3. Diversification: Diversification of portfolios across different markets of the world.

FPI in India

FPI is the largest source of foreign investment into India's equity and debt market. It acts as a positive contributor to India's economic development. SEBI regulates it. It has been divided into two routes:

• Automatic Route: investments that follow guidelines by SEBI and do not require prior approval from the government.
• Approval Route: investments, which need some sort of government clearance, if the sectors exceed the thresholds

Eligibility Criteria for FPI in India

• Investors must be registered with SEBI as Foreign Portfolio Investors
• The portfolio investment is segmented into three categories

1. Category I: Sovereign wealth funds, central banks, and government agencies.
2. Category II: Mutual funds, pension funds and university funds.
3. Category III: Other entities, for example, individuals and trusts.

Problems of FPI

1. Unstable: Susceptible to international and domestic economic condition. Flows in and out in a matter of time
2. Regulatory Risks: Vulnerable to changes in governmental policies and regulations.
3. Currency Risk: Affected by fluctuations in exchange rates.

Impact of FPI on the Indian Economy

• Positive: It encourages market growth, enhances liquidity, and provides additional capital.
• Negative: Large-scale withdrawals can destabilize markets during economic uncertainty.