Suppose India is the home country andUSA is the foreign country. The interest rates in India andUSA…

Uncovered interest parity compares the home interest rate with the foreign rate plus the expected depreciation of the home currency. The rupee is expected to depreciate by (84 − 80)/80 = 5%, so a dollar deposit is expected to earn about 4% + 5% = 9% in rupee terms (exactly 1.04 × 84/80 − 1 = 9.2%), against 6% in India. Since the expected return abroad is higher, investors move funds to the USA and capital flows out of India. Capital would flow in only if the Indian rate exceeded about 9%, and there would be no flows only if the two returns were equal.