CSEET · Economic and Business Environment · Global Environment
Sudden large withdrawals by foreign portfolio investors from Indian equity markets are most likely to cause which of the following?
Large FPI withdrawals put downward pressure on stock prices and the rupee, because investors sell Indian securities and convert rupee proceeds into foreign currency. This raises demand for dollars and can reduce reserves if the RBI intervenes, so it does not help capital formation.
- APressure on stock prices and depreciation pressure on the rupeeCorrect
- BAutomatic increase in India's foreign exchange reserves
- CRise in the rupee value due to higher dollar demand by Indians
- DA permanent increase in long-term capital formation
Explanation
When FPIs sell shares and repatriate proceeds, they sell rupees and buy dollars. This pushes equity prices down and weakens the rupee. Reserves would fall rather than rise if the RBI defends the currency, and capital formation is not boosted by outflows.
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