India is globalised today, its capital account de facto open and financial markets tightly coupled with those of the rest of the world. This is not as much because of foreign investors, the FIIs or foreign banks; it is integrated with global financial markets owing even more to the 250-odd Indian companies who operate abroad. Evidence, especially since September 2008, reveals that the global financial crisis was transmitted rapidly to India primarily through these companies. India’s balance of payments, financial markets, the exchange rate and money markets were impacted hugely by the actions of India’s multinationals.

The balance of payment data from the RBI provides important insights. In the troubled last quarter of 2008, the months of October to December, India saw not merely a sudden stop in capital inflows but a reversal. Although small in magnitude, at $3.6 billion, capital flowed out of India. This was not merely a continuation of the slowdown in capital inflows that had been witnessed since the last quarter of 2007; after difficulties started in the US financial sector, it was a sharp and sudden movement.

However, the most striking fact in the balance of payment data for October-December 2008 is not that capital flowed out, as it did from many emerging economies. It is that the biggest outflow from India took place on account of outbound FDI by Indian companies. Companies actually invested more abroad than they had invested in the previous two quarters. Between October and December 2008, Indian companies invested $5.86 billion abroad. In contrast, in the quarter of April-June 2008 they had invested only $2.9 billion and in July-September 2008 $3.2 billion.

... contd.