Hot money

Subject: Economy

Context: The Reserve Bank of India’s strategy to shift some of its rupee intervention to the forwards market is drawing hot money in India.

Concept:

Hot money refers to the currency that quickly and regularly moves between financial markets and is invested for short-term.
In this investors lock in the highest available short-term interest rates for large gains.
It is less flexible and bring in volatility in economy (Ex- FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy.).
Banks usually attract “hot money” by offering relatively short-term certificates of deposit (CD) that have above-average interest rates. As soon as the institution reduces interest rates or another institution offers higher rates, investors with “hot money” withdraw their funds and move them to another institution with higher rates.

About certificate of deposit

Certificate of Deposit (CD) is a money market instrument and it is negotiable and equivalent to a promissory note.
It is either issued in dematerialized form or in the form of a usance promissory note.
It is issued in lieu of the funds deposited at a bank for a specified time period.