Economics · Financial Markets
During a macro flight-to-safety phase where Foreign Portfolio Investors (FPIs) aggressively pull funds out of domestic equity markets due to global shocks, which sequence best describes the transmission of this shock across financial markets?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Equity prices drop, the domestic currency depreciates due to dollar conversion demand, and domestic bond yields rise as the central bank manages liquidity.✓
- 2Equity prices decline, the domestic currency appreciates due to lower import volumes, and sovereign bond yields fall sharply.
- 3Equity prices contract, the currency weakens structurally, and bond yields decline as sovereign borrowing is curtailed.
- 4Equity prices rally via domestic retail buying, the currency remains static, and commercial bond yields compress globally.
Correct answer
Equity prices drop, the domestic currency depreciates due to dollar conversion demand, and domestic bond yields rise as the central bank manages liquidity.
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