(a) In which sub-account and on which side of balance of payments account will foreign investments in India be recorded? Given reasons.

(b)What will be the effect of foreign investments in India on exchange rate? Explain. (Skipped)

a) Foreign investment includes foreign direct investment (FDI) and foreign institutional investment (FII) or portfolio investment by the residents of a nation abroad or by the rest of the world in the domestic country. Investments made in the assets of a foreign country is FDI. Here, the assets of the foreign country are owned and controlled by the government or any resident within the domestic territory. On the other hand, FII means investment made in the assets of a foreign country. Here, the assets of the foreign country are not owned and controlled by the government or any resident within the domestic territory. These investments lead to an inward flow of foreign exchange and hence are treated as positive items in the capital account of balance of payments.

b) When the foreign investments increases it shows that the investors have faith in the economy, that they will get the desired return. The increase in investment appreciates the currency and hence increases the forex reserve and vice versa when the investors start pulling out their investments from the market.