Short-term, speculative capital that moves quickly across borders chasing the highest short-term return or safety, and which can leave a country just as fast as it arrives.
- It typically takes the form of portfolio flows into stocks and bonds (foreign portfolio investment), not long-term direct investment in factories.
- It is "hot" because it is footloose: a change in interest rates, exchange-rate expectations, or sentiment can trigger a sudden exit.
- Large inflows can inflate asset prices and appreciate the currency; a sudden outflow can crash markets, drain reserves, and weaken the rupee.
- Its volatility is a key reason India keeps only partial concept capital account convertibility and watches foreign portfolio flows closely.
- It is contrasted with stable foreign direct investment; see concept fdi vs fii.
The definition (volatile short-term speculative capital, mainly portfolio flows) and its destabilising effect on currencies and markets are testable external-sector facts.
Hot money is short-term, volatile portfolio capital, not stable foreign direct investment (FDI); FDI builds long-term assets while hot money can flee overnight.
Volatile short-term speculative capital (mainly portfolio flows) that can flee quickly, destabilising currencies and markets.