Wednesday, January 13, 2010

Why India Choked When Lehman Broke

NIPFP Working Paper 63

Ila Patnaik and Ajay Shah
January 2010


India has an elaborate system of capital controls which impede capital mobility and particularly short-term debt. Yet, when the global money market fell into turmoil after the bankruptcy of Lehman Brothers on 13/14 September 2008, the Indian money market immediately experienced considerable stress, and the operating procedures of monetary policy broke down. We suggest that Indian multinationals were using the global money market and were short of dollars on 15 September. They borrowed in India and took capital out of the country. We make three predictions that follow from this hypothesis, and find that the evidence matches these predictions. This suggests an important role for Indian multinationals in India's evolution towards de facto convertibility.