Question

“Foreign Institutional Investors (FIIs) remained net seller in the Indian capital markets over the last few weeks”. - The Economic Times .
State and discuss the likely effects of the given statement on foreign exchange rate with reference to the Indian Economy.

Answer 1

Selling of securities by Foreign Institutional Investors (FIIs) in Indian capital market will lead to fall in the supply of foreign currency in the economy. This situation might lead to ecess demand of foreign currency at the prevailing foreign exchange rate.
As a result, a new euilibrium rate of foreign exchange will be determined which will be higher than the prevailing foreign exchange rate, leading to depreciation of domestic currency.