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Why India choked when Lehman broke

Author

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  • Patnaik, Ila

    (National Institute of Public Finance and Policy)

  • Shah, Ajay

    (National Institute of Public Finance and Policy)

Abstract

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 nd that the evidence matches these predictions. This suggests an important role for Indian multinationals in India's evolution towards de facto convertibility.

Suggested Citation

  • Patnaik, Ila & Shah, Ajay, 2010. "Why India choked when Lehman broke," Working Papers 10/63, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:10/63
    Note: Working Paper 63, 2010
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    References listed on IDEAS

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    2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
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    9. Jaya Prakash Pradhan, 2004. "The determinants of outward foreign direct investment: a firm-level analysis of Indian manufacturing," Oxford Development Studies, Taylor & Francis Journals, vol. 32(4), pages 619-639.
    10. Shah, Ajay & Thomas, Susan & Gorham, Michael, 2008. "Indian Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780123742513.
    11. repec:bla:jfinan:v:59:y:2004:i:6:p:2451-2487 is not listed on IDEAS
    12. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    13. Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 609-644, National Bureau of Economic Research, Inc.
    14. Sebastian Edwards, 2007. "Introduction to "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences"," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 1-18, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Gupta, Abhijit Sen, 2011. "The Current State of Financial and Regulatory Frameworks in Asian Economies: The Case of India," ADBI Working Papers 303, Asian Development Bank Institute.
    2. Patnaik, Ila & Pundit, Madhavi, 2014. "Is India's Long-Term Trend Growth Declining?," ADB Economics Working Paper Series 424, Asian Development Bank.
    3. Patnaik, Ila & Pundit, Madhavi, 2016. "Where is India's Growth Headed?," Working Papers 16/159, National Institute of Public Finance and Policy.
    4. Radhika Pandey & Ila Patnaik & Ajay Shah, 2017. "Dating business cycles in India," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 10(1), pages 32-61, April.
    5. Ila Patnaik & Ajay Shah, 2012. "Asia Confronts the Impossible Trinity," Chapters, in: Masahiro Kawai & Peter J. Morgan & Shinji Takagi (ed.), Monetary and Currency Policy Management in Asia, chapter 7, Edward Elgar Publishing.
    6. Ila Patnaik & Ajay Shah, 2012. "Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(3), pages 439-464, September.
    7. Shah, Ajay & Patnaik, Ila, 2011. "Reforming the Indian financial system," Working Papers 11/80, National Institute of Public Finance and Policy.
    8. Shah, Ajay & Patnaik, Ila, 2011. "India's financial globalisation," Working Papers 11/79, National Institute of Public Finance and Policy.
    9. Thomas Willett, 2010. "Some lessons for economists from the financial crisis," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 3(2), pages 186-208, September.
    10. Radhika Pandey & Ila Patnaik & Ajay Shah, 2019. "Business Cycle Measurement in India," Societies and Political Orders in Transition, in: Sergey Smirnov & Ataman Ozyildirim & Paulo Picchetti (ed.), Business Cycles in BRICS, pages 121-152, Springer.
    11. Basu, Sanjay, 2011. "Comparing simulation models for market risk stress testing," European Journal of Operational Research, Elsevier, vol. 213(1), pages 329-339, August.
    12. Patnaik, Ila & Shah, Ajay, 2011. "Did the Indian capital controls work as a tool of macroeconomic policy?," Working Papers 11/87, National Institute of Public Finance and Policy.
    13. repec:ind:icrier:254 is not listed on IDEAS
    14. Srinivasan Palamalai & Kalaivani Mariappan & Christopher Devakumar, 2014. "On the Temporal Causal Relationship Between Macroeconomic Variables," SAGE Open, , vol. 4(1), pages 21582440145, February.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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