integration with the world has been as deep as india's trade globalization, if not deeper. if we take an expanded measure of globalization, that is the ratio of total external transactions ( gross current account flows plus gross capital flows ) to gdp, this ratio has more than doubled from 46. 8 per cent in 1997 - 98 to 117. 4 per cent in 2007 - 08. importantly, the indian corporate sector's access to external funding has markedly increased in the last five years. some numbers will help illustrate the point. in the five - year period 200308, the share of investment in india's gdp rose by 11 percentage points. corporate savings financed roughly half of this, but a significant portion of the balance financing came from external sources. while funds were available domestically, they were expensive relative to foreign funding. on the other hand, in a global market awash with liquidity and on the promise of india's growth potential, foreign investors were willing to take risks and provide funds at a lower cost. last year ( 2007 / 08 ), for example, india received capital inflows amounting to over 9 per cent of gdp as against a current account deficit in the balance of payments of just 1. 5 per cent of gdp. these capital flows, in excess of the current account deficit, evidence the importance of external financing and the depth of india's financial integration. so, the reason india has been hit by the crisis, despite mitigating factors, is clearly india's rapid and growing integration into the global economy. how has india been hit by the crisis? the contagion of the crisis has spread to india through all the channels – the financial channel, the real channel, and importantly, as happens in all financial crises, the confidence channel. let us first look at the financial channel. india's financial markets – equity markets, money markets, forex markets and credit markets – had all come under pressure from a number of directions. first, as a consequence of the global liquidity squeeze, indian banks and corporates found their overseas financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. also, in their frantic search for substitute financing, corporates withdrew their investments from domestic money market mutual funds putting redemption pressure on the mutual funds and down the line on non - banking financial companies ( nbfcs ) where the mfs had invested a significant portion of their funds. this substitution of overseas financing by domestic financing

trading partners ( table 1 ). in the central scenario, the narrowing of the activity gap that began early this year will last for several quarters. thus, gdp will see annual change between 1. 5 % and 2. 25 % this year, between zero and - 1. 0 % in 2023, and between 2. 25 % and 3. 25 % in 2024. regarding fiscal policy, for this three - year period, the projection envisages a spending path consistent with that reported in the last public finances report ( table 2 ). the board estimates that, following the hike agreed at the june monetary policy meeting, further smaller adjustments in the mpr will be needed to ensure the convergence of inflation to 3 % over the two - year horizon. still, risks are still high, especially considering the level that inflation has reached and its long - lasting persistence. risks surrounding the evolution of the macroeconomic scenario remain significant. the upper part of the mpr corridor reflects sensitivity scenarios where inflation could prove more persistent than expected. this could occur if private consumption continues to show no significant adjustment in the coming quarters. although its fundamentals suggest that it should start to weaken in the short term, it cannot be ruled out that it will continue to be stronger than expected, particularly because of the financing capacity provided by remaining liquidity and the decrease in the level of household debt during 2021. such a scenario may also emerge if strong global cost pressures increase. this would exacerbate the inflationary problem, triggering a stronger monetary policy reaction by various central banks in the short term, but increasing the likelihood of a global recession in the medium term. the lower part of the mpr corridor accounts for scenarios where inflationary pressures dissipate sooner than expected. it is possible that the contraction in activity and demand will be stronger, either due to weaker investment or faster adjustment in private consumption. nor can it be ruled out that the external scenario will see a reduction in global cost pressures and inflation easing in most economies, chile included ( figure 13 ). there are also scenarios where the economy would face more significant changes, which would place growth outside the range of the central scenario projections. one such event could occur if the unfolding russian invasion of ukraine proves much more damaging for the world economy. it could also occur if global financial conditions worsen even more significantly, for example, in a scenario where inflation leads to a much larger than expected tightening of monetary policy in the main economies. inflation has risen to levels