India and capital flows: A world apart India is caught in two minds about financial globalisation

The RBI has a defensive approach to financial globalisation. The laws of economic gravity suggest capital should flow from where it is abundant to where it is scarce. But, the RBI fears, that flow can overwhelm an economy.
In 2007, for example, it tried to restrain a vigorous inflow of capital by making it harder for foreigners to play India’s booming stockmarket and by tightening limits on corporate borrowing abroad. When capital flows abruptly reversed in 2008, it eased these limits. Now that foreigners are again flocking to India’s stockmarket (see chart), capital inflows are once more playing on the RBI’s mind. At the IMF’s annual meetings in October, the RBI’s governor worried that if he had to raise interest rates earlier than other economies, the gap in returns might attract more foreign money. At the RBI’s latest meeting on October 27th, he kept rates on hold.