Foreign Portfolio Investors (FPIs) in the Indian economy

Choose the Correct Answer

Correct Answer : Option d

Explanation
Statement 1 is correct: The Current Account Deficit (CAD) represents the shortfall between a country's imports and exports of goods, services, and transfers. To finance this deficit, countries rely on capital inflows. FPIs, by investing in Indian financial markets, bring in foreign exchange, which can be utilized to bridge the CAD. However, it's essential to note that while FPIs provide necessary capital, they are considered volatile and can exit the market quickly in response to global or domestic changes.

Statement 2 is correct: The Indian government undertakes disinvestment by selling its stakes in public sector enterprises, often through public offerings in the equity market. FPIs, being significant participants in the Indian stock market, can invest in these offerings, thus assisting the government in achieving its disinvestment objectives. Their involvement increases the pool of potential investors, potentially leading to better valuation and successful stake sales.

Statement 3 is correct: Income earned by FPIs from the sale of securities in India is subject to capital gains tax, as per the provisions of the Income Tax Act, 1961. The tax rate depends on the nature and duration of the investment. For instance, long-term capital gains (on listed equity shares held for more than one year) exceeding ₹1 lakh are taxed at 10%, while short-term gains are taxed at 15%.