Capital flows
Also called: Capital inflow, capital outflow · Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 1 "Introduction (Macroeconomics)"; Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
Capital flows are movements of capital into or out of the domestic economy. A capital inflow comes in when foreigners lend to residents or buy domestic assets. It is a credit in the capital account. A capital outflow goes out when residents buy foreign assets or repay loans. It is a debit. Net capital inflows are one of the two ways to finance a current account deficit, the other being reserves.
Example
Shares of an Indian firm sold to a Chinese buyer are a capital inflow. An Indian company buying a UK car company is a capital outflow. In NCERT's Table 6.1, net capital flows are +41.15 (US$ million), which more than covers the current account deficit of −38.
Don't confuse with
- Current account flows: trade, factor income and remittances are current transactions. Capital flows involve buying and selling assets or borrowing and lending.
Related concepts
- Capital account
- BPM6
- Foreign Direct Investment
- Foreign portfolio investment
- Greenfield and brownfield investment
- Automatic route and government route
- Overseas direct investment
- Round-tripping
- External commercial borrowings
- Non-resident deposits