While Greece May Suffer, India’s Fortunes Will Remain Intact

As Indians, we need to be aware of the Greek crisis as it will affect the markets all over the world.

Published29 Jun 2015, 11:41 AM IST
World
3 min read

Global markets are in turmoil as the endgame in the Greece crisis is being played out in the international financial market arena.

Following little progress between Greece and European Union member states over the weekend, Greece ordered a shutdown of its banks and financial markets.

The ensuing tsunami has engulfed markets, across assets class like equities, bonds, oil, commodities and gold.

Does Greece’s Defaulting on its Debt Payment Impact India?

Thankfully, trade relationship between India and Greece is marginal, at around $500 million (both import and export) to have any meaningful impact on the former. But it is the potential indirect impact which is worrying Indian markets.

Since Greece is part of the Euro zone which has a unified currency, any impact in Greece will be felt on the entire Euro zone. The Euro is already trading at its lowest level in a month against the dollar at $1.1020. It is also trading at its lowest level in a month against the rupee at Rs 70.78.

There are two fallouts of Greece’s default. First, it will result in Greece being thrown out of the Euro zone. Second, it will start a domino effect leading to defaults by other countries and banks which hold Greece’s debt.

Germany has been vocal about removing Greece from the Euro zone. Analysts feel that if Greece is thrown out of the Euro zone other peripheral countries, especially those holding huge amounts of debts of other Euro members, would also like to leave the common currency. This would create a big shakeout in the currency market which will severely impact India, especially given the volume of foreign currency that India has attracted post the Narendra Modi government assuming power at the Centre.

Though Reserve Bank of India governor Raghuram Rajan has strategically shored up foreign currency reserves to a record $355 billion for such an eventuality, India along with other countries will still be hit if there is a global turmoil.

As for the second fallout – the domino effect – the global impact will be limited. Most of Greece’s debt is now being held by various countries within the Euro zone, the European Central Bank and the IMF.

The risk has been divided among these three entities with private sector players holding only a small amount of debt. Of the total debt of Euro 242.8 billion, private lenders account for only Euro 38.7 billion.

Traffic police looks at the front page of newspapers after Sunday parliamentary decision in favor of the July 5 referendum. (Photo: AP)
Traffic police looks at the front page of newspapers after Sunday parliamentary decision in favor of the July 5 referendum. (Photo: AP)

But if Greece defaults it will make the Euro weaker, and in the event of the Euro weakening against Indian the Rupee, exports from India to the entire Euro zone will become costlier.

By the same logic, a weaker Euro will impact almost all countries. India’s exports have been shrinking on account of poor growth in the global market. The Greece crisis will further hot global growth thus taking a toll on Indian exports.

Silver Lining for India

However, there is a silver lining for India in this crisis. India’s growth story is because of its domestic consumption. Though exports will be impacted if global economies slowdown further, re-making of India will continue to attract capital.

There are few economies in the world that can attract and absorb huge volume of capital the way India can.

China is slowing down fast and its markets have come crashing down over the last one month. India is once again on top of the investment chart.

The Greek crisis will have a short term impact on the financial markets but little negative effect on the real economy. If anything, the resulting impact on falling crude oil prices will strengthen India’s case as a preferred investment destination.

(The writer is a Mumbai-based market analyst.)

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