What is Capital Flows?
Capital flows, as the name suggests, consists of all the money moving between countries for the purpose of investment and business production. The flow of money is not only for purchasing each others’ goods and services; it is instead the money flowing between different countries in the sector of bonds and stock markets. We know that imports and exports between countries shift the supply and demand between them. In the same way, money flowing between countries brings a change in supply and demand as well. Lately, the barriers in foreign investments have been reduced, and there has been a vast development in the technology. Therefore, it has become convenient for foreign investors to get into other countries for investment purposes. For example, when a country is performing better than the other country, the investors pour money into the performing country in anticipation of good returns. This incoming money is reflected in the country’s capital account. Hence, capital flows.
It should be noted that capital flows and current account go hand in hand. As the interaction between the two gives investors a symptom on the future of the currency’s rise and fall.
There are different sets by which capital flows, such as asset-class movement, venture capital, federal budget, mutual funds flows, and capital spending budget.
Asset class movement – It is the capital flows between cash, stocks, bonds, etc.
Venture capital – It is the capital invested in start-up companies.
Mutual fund flows – As the name suggests, the capital flows in stocks and bonds from a broader perspective.
Capital spending budget – They are used to measure the growth plans at the corporate level.
Federal budget – They go in accordance with government spending plans
The relative strength and weakness in the capital markets can be gauged with the help of capital flows and the federal budget. Investors often look at the growth rates such as venture capital and capital spending budget to determine the future trend in the markets.
Factors affecting Capital Flows
Several factors influence the capital flowing between countries. But, in the end, it boils down to these:
- A drastic rise in the domestic money demand
- Amplification in the domestic capital output
- Drop in the interest rates
Effects of Capital Flows
Capital flows have quite an impact on the economy of a country. The significant effects on the Capital Flows are as given below.
1. Capital Flows in a country have an impact on its demand. When international portfolios flow their capital into a country’s stock exchange, it causes demand in its stock prices, and its prices are seen to rise. Also note that, when capital flows in a country’s stock exchange, the prices seem to dip sometimes as capital flows alone don’t move the market.
2. Money Supply and liquidity are also affected by capital flows. When money flows into a country, automatically the money supply and liquidity rises. This fact, in turn, helps in the appreciation of the country’s exchange rates. Sometimes the demand for the local currency becomes quite excess. In such cases, the monetary bodies purchase foreign currency to maintain such flows. This purchases, then, result in the accumulation of foreign exchange reserves as well as the money supply.
3. Capital Flows are a dominant cause for an economic boom in a nation which leads to a rise in asset prices.
From the above points, we can perceive that capital flows hold a vital role in the country’s financial growth.
A reliable source of information on capital flows
From the previous topic, it is clear that reports regarding capital flows in a country are essential to economists and investors. Therefore, there are websites that provide complete information about capital flows in different counties.
Below are the links for accessing the numbers of some major countries. These links specifically provide info on actual capital flows data, historical data, chart representation, etc.
USA (unit – USD) – https://tradingeconomics.com/united-states/capital-flows
Australia (unit – AUD) – https://tradingeconomics.com/australia/capital-flows
Japan (unit – JPY) – https://tradingeconomics.com/japan/capital-flows
UK (unit – GBP) – https://tradingeconomics.com/united-kingdom/capital-flows
Canada (unit – CAD) – https://tradingeconomics.com/canada/capital-flows
New Zealand (unit – NZD) – https://tradingeconomics.com/new-zealand/capital-flows
Euro area (unit – EUR) – https://tradingeconomics.com/euro-area/capital-flows
Switzerland (unit – CHF) – https://tradingeconomics.com/switzerland/capital-flows
What do traders and investors care about capital flows, and what is its impact on Currency?
Traders and investors look forward to the data on capital flows as it can be helpful to them for taking decisions regarding investing. When a country’s market is performing pretty well with a rise in growth, foreign investors often tend to be interested in investing in the other country’s domestic markets. Therefore, they exchange their foreign capital into the local currency to participate in the market. This leads to the demand in demand in the money, and the exchange rates are seen to inflate.
Generally, people are only familiar with the equity market. But, there exist bond markets in most currencies which are larger than the equity markets. This can produce a more significant impact on the currency. When interest rates on bonds are raised, this will typically attract the foreign investors to pump in capital into those countries. Therefore, this then brings more demand to the local currency.
Frequency of release
The frequency of release of data on capital flows varies from country to country. Usually, the rate is either quarterly or monthly. In countries such as Australia (AUD), Canada (CAD), New Zealand (NZD), Switzerland (CHF) it is released every quarter while, in Euro area (EUR), Japan (JPY) and the USA (USD) the frequency of release is about a month.
We have seen how international capital flows can affect the growth of a country in many sectors. Capital flows are affected by both domestic and global factors whose importance varies with time. It also provides significant advantages to investors and beneficiaries. Capital flows have a sensitive effect on economic growth. Thus, it is a challenge for developing countries to handle the inflows in a benefiting manner. While in some countries, they have restricted capital inflows and outflows to keep a balance in the country.