WHY FII WITHDRAW THEIR FUND WHEN CENTRAL BANK INCREASE INTEREST RATE ?

Foreign institutional investors (FIIs) may withdraw their funds from a country when the central bank increases interest rates for several reasons:

1. Higher interest rates make investments in the country relatively less attractive: When interest rates increase, the yield on government bonds and other fixed-income securities also goes up. This makes these investments more attractive to foreign investors. However, at the same time, higher interest rates also mean that borrowing costs for companies and individuals increase, which can reduce the demand for goods and services in the economy. As a result, the overall economic growth may slow down, making investments in the country relatively less attractive.

2. Currency appreciation: Higher interest rates can lead to an appreciation in the currency of the country. This can make exports more expensive, reducing the competitiveness of the country's products in the global market. As a result, foreign investors may withdraw their funds and invest in other countries with a weaker currency and more competitive exports.

3. Higher inflation: If inflation is high in the country, it can reduce the real return on investments for foreign investors. If the central bank increases interest rates to combat inflation, it can lead to a decrease in investments by foreign institutional investors.

4. Risk-aversion: Finally, foreign institutional investors may withdraw their funds from a country due to an increase in the perceived risk associated with the investment. For example, if there are concerns about political stability or economic uncertainty, investors may become more risk-averse and withdraw their funds. This can lead to a decrease in demand for the country's currency and a decrease in its value.