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A key component of ensuring the growth and success of the economy is creating a solid and stable financial market. Different players who dominate the domestic market and markets abroad are to blame for stock market fluctuations. One of these elements is a capital market investment in the form of a foreign portfolio.
After the liberalisation process, foreign portfolio investment became more significant in the Indian stock market because these institutions’ investments in India were only authorised after the 1992 economic reforms.
Foreign institutions that invest fall under the category of more experienced, knowledgeable investors because of their involvement in a wider variety of assets. Foreign Portfolio Investment does have a significant impact, particularly in the Indian capital market, where they hold a large number of securities. Consequently, they have emerged as one of the key factors influencing India’s economic growth.
Foreign Portfolio Investment (FPI)
A Foreign Portfolio Investment (FPI) entails the investor’s acquisition of overseas financial assets. It involves a variety of financial assets, including mutual funds, stocks, and fixed deposit accounts. Investors who make investments in overseas portfolios are known as Foreign Portfolio Investors.
The Securities and Exchange Board of India (SEBI) oversees foreign portfolio investment in India. In India, FPI refers to investment groups or “foreign institutional investors” (FIIs) and “qualified foreign investors” (QFIs).
A capital market is a financial marketplace for the purchase and sale of assets backed by long-term debt or equity. Suppliers are individuals or groups with the financial resources to lend or invest. Common examples are banks and investors. The Securities Exchange Board of India governs the Indian capital market.
The capital markets or share markets of India make up a sizeable percentage of the global economy because of India’s fair share of the global economy. The financial system depends on the capital market.
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Two types of markets are:
Primary Market: The initial public offering (IPO) market, often known as the primary market, is where businesses first issue shares. The company’s shares are listed on the stock exchange after getting the IPO successfully. Money is raised for the primary market through prospectus, rights offerings, and private placements. The funds are raised to help the business develop and grow.
Secondary Market: A secondary market is where listed shares and other securities are traded. The market area for buying and selling securities is typically a stock exchange. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are India’s two leading stock exchanges, accounting for most equities trading and investments. NSE and BSE are perfect examples of secondary markets.
Depending on the volatility of the market where the investment is made, FPI consists of securities and other foreign financial assets held by the foreign investor; it does not give investors direct ownership of financial assets. FPI enables investors to diversify their portfolios with a global advantage. It can be made by individuals, businesses, or even governments in other nations.
In 1991, when India’s economy opened up, it unlocked better and greater opportunities to attract foreign investment in the Indian capital market. It was a game-changer when the RBI decided to allow SEBI-registered FIIs, NRIs, PIOs, and OCBs to invest in the Indian stock market through the portfolio investment plan. Asset management firms, pension funds, mutual funds, banks, investment trusts, nominee businesses, and institutional portfolios are examples of organisations that may register as FIIs. One of the main forces behind the growth of the Indian stock market has been foreign portfolio investors (FPIs) and foreign institutional investors (FIIs).
Impact of FPIs on Domestic Capital Markets
FPIs are often higher in developing nations with large growth potential. FPI is significant since it fuels the stock markets and increases the liquidity of the host nation’s capital markets. FPIs in India will also benefit the investor and the expansion of the Indian economy. The efficiency of the stock market and economic growth will increase as the FPIs rise. From the above discussion, we can conclude foreign portfolio investment is crucial in India.
Read our Article:Factors Influencing Foreign Portfolio Investments (FPI)
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