Q. With reference to Foreign Portfolio Investments, consider the following statementes;
1.FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).
2.FPI promotes the development of Equity Markets.
Which of the statements given above is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: C
Notes:

Both statements are correct.

Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.

FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP). FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy. FPI is more liquid, volatile and therefore riskier than FDI.

As the market’s liquidity and functionality evolve with FPIs, equity prices will become value-relevant for investors, ultimately driving market efficiency.

Source: Indian Express