FII flow vs Interest rate vs inflation

Just an attempt to relate all this macro economic variables.
We recently see a huge surge in the FII inflow into the country.October month alone contributed around one-fourth of the total inflows this year. What could be the reason for this inflow, obviously it is because of the better returns in India compared to other countries and more opportunities in terms of primary market.

This has lead to an increased flow of foreign currencies which will convert the available rupee in the economy into portfolio investments. Because of this the availability of rupee in the economy will get reduced which is transformed into the depreciation of foreign currency and appreciation of Indian rupees (due to increased demand of rupee). You can see observe this through the volatility especially between USD,EUR with INR .

Is the foreign currency flow is good or bad for economy. It is how the country's internal policy able to utilise this flow and If the country is not able to utilise this opportunity again the flows can be reverted in short term. Here comes RBI, The effective conversion of this foreign currency flows into forex reserves is one of the job of RBI during these times and this is done by accumulating the forex reserves which will help to smoothen the effect of current account deficit. This is usually done by RBI through monetary tools like repo , reverse repo.

Also this FII inflow will increase the money supply in the economy which will increase the inflation to an extent in case there is no substantial output created. But since inflation is one of the effects of FII flow , FII flow cannot be restricted which will affect the growth of the country. Country's economy and policy should be good enough to absorb such FII flows. So this inflation which we see is not alone due to FII's its also because of internal economic policies. this increase in inflation need to curbed through increasing interest rate which is now done by RBI with a 25 bps raise in repo and reverse repo.