Multinationals and the erosion of effectiveness of capital controls against foreign borrowing

Indian capital controls impede foreign borrowing by corporations, and particularly short-term debt. In recent years, many Indian companies have become multinationals, which makes it possible for them to obtain short-term debt finance into offshore entities. This paper tests the extent to which Indian MNCs have greater exposure to global credit market conditions. The exposure of each firm to the Moody’s Baa spread is directly measured from stock prices. We find that this exposure is bigger for multinationals. The stock market performance of a portfolio which is long multinationals, and has short positions in matched non-multinational firms, is examined. The returns of this portfolio strongly responds to the Moody’s Baa spread. This evidence suggests that capital controls against short-dated foreign currency debt become less effective in the presence of multinationals.