Foreign Capital Flows

With the globalization of financial market private capital has now been moving around the world in search of highest returns. Capital crosses boarder of a country more easily than labor. The growth in the flow of foreign capital has become possible only because investment policies in the western countries have changed to allow higher investments, including portfolio investments abroad. The structural adjustments, following economic reforms, reduction in budget deficits, restructuring of public sector, relaxation of trade and exchange controls etc., have created a favorable climate for capital inflows into many developing countries like India.

Capital owners are, first and foremost looking for good returns and at the same time they are deeply concerned with risks. The attractions for them are: (i) good in fracture (ii) a reliable and skilled lab our force, (iii) guarantees of their right to repatriate both income and capital (iv) social and political stability. (v) A tradition of prudent fiscal management and (VI) deep links with global markets. Foreign capital inflow may broadly be classified into three types

• Portfolio investment by foreign institutional investors.
• Direct foreign investments.
• Capital raised by domestic companies through euro-issues

Besides the long-term capital flows in the forms of direct and portfolio investments abroad, there is a flow of capital among nations for a short period as well. These flows take the forms of export credit and loans, Imports debts, banks deposits, and commercial papers held abroad, foreign currency holdings and obligations, etc., incidentally, we might note that the difference between long term and short term capital flow is one the basis of instruments rather than the intentions of the investor.  The short- term capital flows across nations take place due to a variety of factors. Further, the determinant of these flows depends on the type of the flow.  In order to explain their determinants, it is convenient to divide the short-term flow into three categories, viz, trade capital, arbitrage and speculative.