The memories of last September, when a vicious spiral of rumors and relentless pressure from investors pushed Lehman Brothers to the brink, came to the fore on Friday with UAE announced to restructure Dubai World, an investment company that spearheaded the emirate's breakneck growth.
On Wednesday, Dubai said it would reschedule debt on two state owned entities delay payments for six months.
By Thursday, rumors of a possible default on Dubai sovereign debt started to hit markets. The same day, the Dubai ruling family clarified concerns but credit default swaps reflecting the chances of a default kept rising.
The result was a sharp turn in sentiment which led to investors selling risk assets across equities, commodities and currencies and forcing regulators across the world including India to sit up and take notice.
"We shouldn't react to instant news like this. One lesson that we learnt from the (global financial) crisis is that we must study the developments and measure the extent of the problem and hence study the impact on India," said Dr D Subbarao, governor of RBI.
For India, the real impact from financial concerns in Dubai will be limited. Remittance flows from Dubai, which account for about 10 per cent of overall remittances, could see a slowdown in the short term.
Capital flows may see a mild reversal turning the equity and currency markets volatile but corporate exposure to Dubai appears to be limited to a handful of realty and infrastructure companies.
And barring a few banks like Bank of Baroda which has operations in Dubai, the Indian banking sector seems relatively insulated.
But the Reserve Bank of India is not taking any chances and has asked all banks to submit a detailed report on exposures to Dubai.
While the macro economic impact on India and most other nations may be limited, the fear of a debt default from Dubai may end up being a much needed reality check for global investors, who seem to have forgotten one of the worst financial crises in history a little too fast.
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