Unnerved by the extreme uncertainty, global investors exited India, as they did other emerging economies, to return to safe havens. The sudden exit put downward pressure on the rupee, and this time round we had to intervene in the foreign exchange market to contain the volatile depreciation of the rupee.
As the crisis started ebbing, the direction of the capital flows problem changed once again. The two speed recovery, quantitative easing by advanced economies, and importantly, their guidance that their easy monetary stance would prevail for an extended period drove global excess liquidity into emerging economies pushing up their exchange rates. This was the case for much of 2010 and early 2011.