Hot Money

Hot money refers to funds which flow into a country to take advantage of their high interest rate, and therefore obtain higher returns. Recently, some people claimed that there is entry of foreign hot money into the equities of Malaysia as the result of rapid increase of KLCI. However, is the rise of the KLCI is an indicator of the healthy state of the Malaysian economy? The entry of foreign money should not be bad things as if it is a form of foreign direct investment (FDI) because the plants that have been set up is not that easy to be sold and the capital are not that liquid. If our country has huge amount of reserves, the risks of having the entry of hot money could be diversified. The action of BNM to hold its overnight interest rate at 2.75% is the first defense against the inflow of hot money. This may defer the speculators that are going to take the advantages of interest rate on the differential and to manage this arbitrage.