DMPQ- How the interest rate of the central bank of any nation affects foreign capital Investment in India?

The interest rate fluctuation impacts foreign investment in India. The developing countries like India tend to have a higher interest rate than those developed countries. The foreign investment institutes such as FIIs (Foreign Institutional Investors) borrow money from their domestic market at a low-interest rate and invest it in countries like India where the interest rate is higher. If the interest further lowers, the investors will get encouraged to invest in economies like India as the scope of better returns can be found. More investment will increase the capital flow and the Indian economy will witness a raise.

In the scenarios of the increasing interest rate of the Federal Reserve, the interest rate difference of the US and India minimizes and the investors withdraw the investment as India becomes a less attractive country for investment. As a result, a considerable amount of money has moved out of the Indian economy and flown back to the US. It is known as the flight of capital. Such happenings are certain to decrease the value of Indian currency against the Dollar. The weakening of rupee will benefit export companies and will have a negative impact on importers.

 

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