and Macro-Economic Stability Ranjit Sau Foreign capital comes in two forms: direct foreign investment (DFl) and foreign portfolio investment (FPI). This paper presents a simple model to examine the conditions of stability with the inflow of foreign capital We find that the equilibrium is most likely to be stable if the interest-elasticity of DFl is high andthqt of FPI is low. The experience of India, however, indicates that the situation here is just the reverse that implies the possibility of instability.