Q. 143.8( 10 Votes )
Selling of foreign institutional investors FII in Indian capital market will lead to fall in the supply of foreign currency in the economy. This situation might lead to excess demand of foreign currency at the prevailing foreign exchange rate.
Investments by large MNCs in India will ensure greater inflow of foreign exchange, leading to an increase in the supply of foreign currency. The situation may result into excess supply of foreign currency in the economy at the prevailing foreign exchange rate.
As a result, a new equilibrium rate of foreign exchange will be determined which will be lower than the prevailing foreign exchange rate, leading to appreciation of domestic currency.
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