Posted in Finance, Accounting and Economics Terms, Total Reads: 114
Definition: Hot Money
Hot money is that money that moves quickly i.e. there is quick cash outflow from one investment opportunity to another investment opportunity which would be providing gain quickly in the form of higher interest. Hot money is when investors look out for business investments where money can be invested for a limited duration of time which can yield profits.
1) Within the country borders: - short term investors scan the domestic market and invest in the investment opportunity which gives him the maximum returns. In case there comes another opportunity where they can gain more they quickly take out their investment to invest in the new opportunity.
Example:-ABC Pvt Ltd Company offer 3% interest rate on its bond but company XYZ offers 5% rate of interest. People who had invested in ABC Pvt Ltd will now move their investment to XYZ Company.
2) Across country borders (international finance):- cash outflow outside the country for better investment opportunity is known as investing across borders. These outside country investment is generally for higher interest rate or anticipated exchange rate change.
Example: - In china suppose the rate of interest is 3%. People would invest in 3 % rate of interest from all the other countries where the rate of interest is not that high. For example US, which for several years had close to zero rate of interest. For instance the rate of interest of India is 4%. Short term investors will now take out money from china and invest in India for greater returns. Such kind of investments can also have negative effect for the economy.
Like in the example there was outflow of investment from china and inflow to India meaning the Indian rupee will appreciate with rest to china. Hence it will have a negative effect over the exports in the country and may reduce forex reserves or lead to over production similarly for China there will be depreciation in the currency leading to cheaper exports and costlier imports
Estimation of hot money
Estimation of hot money is difficult as the money flows too quickly and proper recording is not done. With this even if it is estimated at a particular point of time it may increase or decrease suddenly hence, such calculation remain of no use.