Positive Impacts of Foreign Investment

Increased Liquidity

The market becomes more liquid when money from overseas investors is brought in. Think of it as a pond; more water, or money, facilitates the buying and selling of shares by investors (just like fish swimming freely). Improved liquidity has the potential to improve market efficiency.

Market Expansion

Promising enterprises are frequently the focus of foreign investors, which increases demand for their shares. Stock prices may rise as a result, improving market performance as a whole. Consider the idea that a business grows as a result of its reputation drawing in more clients.

Diversification of the Market

Different ideas and investment methods are brought to the market by foreign investors. A more balanced and healthy market environment may result from this. Envision a healthy market where investors may choose from a variety of food groups and a balanced diet.

Appreciation of Currency

The Indian Rupee may occasionally strengthen as a result of increased foreign investment. This is because purchasing Indian stocks requires Rupees, which drives up demand for the currency among overseas investors. Indian consumers stand to gain from lower import costs due to a stronger Rupee.

Negative Impacts of Foreign Investment

Market Volatility

International investors may be more susceptible to world events and economic instability. A rapid sell-off of their shares could result in sharp declines in stock prices and increased volatility in the market. Imagine a storm that causes the pond’s (the market’s) waters to become turbulent.

Dependence on Foreign Funds

If the Indian market is overly dependent on foreign investment, it may become susceptible to outside influences. Foreign investors may remove their money, which would have an effect on the market, if they lose faith in the market or discover better chances elsewhere.

 

Changes in Exchange Rates

Indian exports may suffer from a high Rupee as a result of FI since they will cost more to customers abroad. Imagine a strong Rupee making Indian mangoes too expensive for export markets.

 

Examples:

Beneficial Impact: A sizable FII made significant investments in Indian renewable energy firms in 2023. Due to the rise in demand for their shares, their stock price grew and more investments in the green industry were drawn in.

Drawback: In the 2008 global financial crisis, a lot of international investors withdrew their capital from developing economies such as India. The result was a sharp downturn in the Indian stock market.