Hot Money refers to capital that moves quickly and frequently between financial markets or countries in search of short-term, high-yield returns. This type of investment is highly sensitive to interest rates, currency movements, and market conditions, and it can both boost and destabilize an economy depending on its flow direction.

Typically, hot money involves short-term funds from foreign investors or institutions entering a countryís financial markets to benefit from higher returns compared to other regions. For example, if India offers higher interest rates than developed economies, investors might move their capital into Indian bonds or equities. However, if global rates rise or risk perceptions change, this money may exit just as quickly.

The primary characteristic of hot money is its liquidity and volatility. It often targets assets such as government securities, foreign exchange, or short-term deposits that can be easily sold or converted. While inflows of hot money can temporarily strengthen a countryís currency and financial markets, sudden outflows can cause currency depreciation, market corrections, and liquidity shortages.

To monitor and manage these flows, central banks and governments track capital account movements and sometimes impose controls to maintain financial stability. Excessive dependence on hot money can be risky, as it creates economic vulnerability to global shocks or changing investor sentiment.

In essence, hot money plays a double-edged role ó it enhances liquidity and foreign investment when entering markets but can trigger instability if withdrawn abruptly. Understanding its behavior is crucial for policymakers, investors, and economists aiming to balance growth with financial resilience.