Hot money
Money that flows frequently from one country to another seeking out the most favourable rate of interest is called hot money.
It has a substantial effect on the balance of payments between two countries and tends to strengthen the currency of the recipient country at the cost of the currency of the country where the money was previously held.
Such money flows largely originate from hedge funds and speculators. In fact, these transactions were the immediate cause behind the currency crises in Mexico and East Asia in the 90s.
Due to the highly volatile nature of such investments and the potential consequences of their sudden exit, market watchdogs across the world keep a keen eye on them. To curb any excessive inflow of hot money into the country SEBI has made it difficult for hedge funds to conduct operations in the country and closely manages P-notes, the only trading instrument available to them.
Tags: Daily Funda