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Why the Greek crisis may just be a passing hiccup for India

06 July, 2015

Greeks rejected the terms of a bail-out offered by Eurozone members to help tide over its sovereign debt default in a referendum on Monday, opening the doors for its exit or ‘Grexit’ from Eurozone. The referendum, which has aggravated the possibility of Grexit, however, had little impact on Indian markets despite playing on the minds of investors for several months now.

Although Indian benchmark stock indices fell as much as 1 per cent and the rupee depreciated against the dollar in early morning trades, 30-stock Sensex ended the day at 28,208.76, up 0.4 per cent.

Devang Mehta, senior vice president and head – equity advisory, Anand Rathi Financial Services, said: “We have been quite vocal about market presenting a buying opportunity whenever any adverse news from Greece flows in. We are more or less insulated from the proceedings in Greece with strong foreign exchange reserves, improving macros  and crude again heading southwards.”

“For our markets, the Q1 earnings season, progress of the monsoon and the monsoon session of the Parliament are likely to be key triggers,” he added.

Economists and market analysts say this reflects the over-blown concerns of the impact of Grexit on India. Greece is not a big market for Indian exports nor a significant source of imports. Indian companies’ exposure to Greece as a market and presence of Greek firms in India is also not significant to roil the markets.

The debt crisis in Greece, which has been brewing for some time and intensified after the country missed its payment to IMF, is now predicated on two things: whether Eurozone keeps Greece in the loop and offers another bail-out option with less austerity measures or paves the way for a structured exit for the country from the 18-member European Union.

In either case the impact on India may be minimal, say experts.

Keeping Greece in the loop shall mean it remains essentially a Eurozone problem, with the strongest economy in the group Germany having to back down on its terms in its election year.

Grexit, on the other hand, will fuel fears of a Eurozone break up with member states in financial stress looking at exit as an option which will have implication across the world especially on the emerging markets with investors pulling money out for safe haven assets. (click here for more details) 

Turmoil in the Eurozone, which is India’s largest trading partner, may hamper the flailing exports of the economy. Most economists interviewed by VCCircle said what we may see is a knee jerk reaction and the Greek crisis will have no impact for the real economy.

Meanwhile, despite the debt default, Grexit is seen as an unlikely outcome given the costs to both the Eurozone and Greece. While members will try their best to get Greece back to negotiations, the cost of printing more money will be too high for Greece to step out of the Eurozone fold.

But here’s a look at what will Grexit mean for India:

Stock market volatility

Though the markets started the year with a euphoria, weak corporate earnings coupled with geo-political tensions, a bounce back in oil price and weakening investor confidence have rocked the Indian markets. The markets have recovered a little since then but a full-blown crisis in the Eurozone is expected to keep not just other emerging markets but India also on the tenterhooks. This means more volatility.

“Most of the contagion is still quite limited to the financial markets. The development have been quite dynamic and quite fluid but I don’t think there will be any impact on the Indian real economy or macro side. As far as impact on financial markets is concerned it will not just be India but Asia as a whole,” said Radhika Rao, senior economist at DBS.

“Domestically monsoon and parliament session are more important for the economy than Greece crisis,” she added.

Rupee may depreciate

While the rupee was one of the strongest emerging market currencies last year, it has taken a beating against the greenback since the start of the year. With a US Fed rate hike on the horizon and investors fast losing confidence in the government’s ability to clear major reforms, the currency has depreciated further against the dollar touching the Rs 64 mark against the US dollar. RBI has been able to contain the fall by intervening in the markets and has assured that it will keep doing so, but a crisis and resulting outflow of investors may limit the ability of the bank to handle the fall in the currency. This can lead to higher price of imports including oil which can further feed into the inflation numbers.

However, Shilan Shah, emerging markets economist at independent research outfit Capital Economics, believes that a narrow current account deficit and high foreign exchange reserves may prevent the rupee from falling in the long run.

“You cannot rule out any volatility; rupee has weakened slightly given the referendum. However, these moves are relatively small both in terms of previous movements to rupee worsening to external conditions and as compared to currencies in Asia or emerging world which is a reflection of improvement in India’s external position in past couple of years. These movements are very small and are not really a cause of concern,” he said.

Exports not much pain

The key threat to the economy comes in the form of falling exports to the Eurozone but economists believe that the fall of Athens may not have much of an impact on the already fidgety exports.

“Exports may see a small impact but only temporarily,” said Madhumita Ghosh, research head at Augment Financial.

Adds Radhika of DBS, “Things are different from 2008-09 when it (Eurozone) wasn’t growing as fast or did not have tools necessary to address any such contagion. The biggest tool that they have is QE and so any kind of contagion risk, the first point of action is to expand QE purchases and make it longer than September next year which will help ECB control the situation.”

Delayed rate cut

What still hangs as a risk factor is the impact on further rate cut by the Indian central bank. While RBI governor Raghuram Rajan had pointed out that future rate cuts will be predicated on below normal monsoon in India, the El-Nino impact hasn’t had much impact with above normal monsoon, leaving wiggle room for the RBI to cut rates.

The fall of Indian currency against the dollar may put the rate cut on hold for longer. This could delay any resurgence in investment activity.

But Prashant Sawant, senior economist at Verisk Maplecroft, a UK-based global risk and strategic consulting firm, believes that domestic factors may play a much bigger role in influencing rate cut decision.

“For Rajan to decide on rate cut domestic economy is more important than what’s happening externally at least at this point of time. Monsoon so far has been good and price pressure hasn’t started building up yet, that is the main concern. The possibility that US may not raise rate this year also gives breather for Rajan to ease rate policy in India. Indian industrial sector is still grappling with sluggishness and Greece doesn’t impact India at this point of time,” he said.


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Why the Greek crisis may just be a passing hiccup for India

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