Q. Many a times we read in the newspapers that when Foreign Capital is allowed to enter the country freely, it can affect the economy adversely. Which among the following is a correct reason for the above assumption?
Answer: It poses risks to the value of the country’s currency as well as management of local liquidity
Notes: Foreign capital inflows can lead to currency appreciation, making exports more expensive and imports cheaper, which can negatively impact the balance of payments. Additionally, excessive foreign investment may create volatility in local markets and complicate liquidity management. Countries like Argentina and Brazil have experienced such challenges, where sudden capital flight led to economic instability.