In India, the term hot money is commonly used to refer to which type of capital flow?

Introduction / Context:
In discussions about the external sector and balance of payments, the term hot money is often mentioned. It refers to a particular type of international capital movement that can enter and leave a country very quickly. This question checks whether candidates understand what hot money means in the Indian context and can distinguish it from more stable forms of capital flow such as long term foreign direct investment.

Given Data / Assumptions:

• The question asks what the term hot money refers to in India.
• Four different types of flows or positions are mentioned: central bank currency and reserves, GDR related flows, foreign direct investment and foreign portfolio investment.
• We assume standard macroeconomic definitions used in textbooks and policy discussions.

Concept / Approach:
Hot money is generally associated with capital that moves rapidly across borders in search of short term returns. It is sensitive to interest rate changes, exchange rate expectations and market sentiment. Such flows can quickly exit a country, causing volatility. Foreign portfolio investment, which includes investment by foreign institutional investors in shares and debt securities, has this nature. By contrast, foreign direct investment involves long term commitments like factories and infrastructure, which are not typically reversed overnight. The other options listed in the question do not capture this idea of fast moving capital.

Step-by-Step Solution:
Step 1: Understand the central idea of hot money. It is short term capital that moves quickly between countries to take advantage of interest rate differentials or expected changes in exchange rates. Step 2: Consider option A: currency and reserves held by the Reserve Bank of India. These are official foreign exchange reserves and domestic currency in circulation, not speculative foreign capital. They are not described as hot money. Step 3: Look at option B: net receipts from Global Depository Receipts. GDRs can involve foreign investors, but they represent a more structured, often longer term capital raising mechanism for firms and are not the standard textbook example of hot money flows in macroeconomics. Step 4: Examine option C: net foreign direct investment. FDI typically involves physical investment in plant, machinery or businesses and therefore tends to be relatively stable and long term. It is usually not classified as hot money since it cannot be withdrawn as quickly as portfolio holdings. Step 5: Evaluate option D: foreign portfolio investment or short term capital flows. Foreign institutional investors can bring in funds to buy stocks or bonds and can pull out quickly when market conditions change. This behaviour matches the concept of hot money. Step 6: Therefore, in the Indian context, hot money refers mainly to foreign portfolio investment, which is best represented by option D.

Verification / Alternative check:
A good way to verify is to remember episodes when foreign institutional investors suddenly withdrew funds from Indian markets due to global uncertainty. Those outflows caused rapid changes in stock indices and the value of the rupee. Policy discussions during such episodes commonly referred to these flows as hot money. On the other hand, foreign direct investment projects are not described in this language because they are locked into physical investments and cannot be reversed overnight. This supports our choice of foreign portfolio investment as the meaning of hot money.

Why Other Options Are Wrong:

• Currency and reserves with the central bank represent domestic money supply management and official foreign exchange holdings, not speculative foreign capital.
• GDR related flows are not the usual reference when economists speak about hot money in India.
• Foreign direct investment is considered stable, long term and relatively illiquid, so it does not fit the fast moving nature of hot money.

Common Pitfalls:
Some candidates assume that any foreign capital must be hot money and therefore confuse FDI with portfolio flows. Others see the word money and think immediately of central bank reserves. Another confusion arises when learners mix up acronyms like FDI, FII and GDR and do not pay attention to the underlying difference between ownership control and tradable financial securities. Remembering that hot money is associated with quick in and out movements of financial capital helps avoid these mistakes.

Final Answer:
Foreign Portfolio Investment (short term capital flows)