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India may see flight of capital due to Greece debt crisis:Ficci

Posted by cvbasheer on June 7, 2010

A study by an industry chamber today stated that with deleveraging expected to continue in the global markets, there is likely to be flight of capital from equity markets in emerging economies including India.

Further, it also said debt related flows could also be lower as global financial market players hesitate to invest in non-dollar areas. As a Consequence of which capital flows to India could be on the lower side in the next six months or so.

A Quick Survey by FICCI eliciting the views of top economists on the implications and impact of Greece debt crisis for India and the global economy reveals that with capital flows into the country expected to slow down if not completely reverse in the coming six months, the liquidity situation would also be a little tight in the days and months ahead.

However, the surveyed economists have opined that RBI would ensure enough liquidity in the system to keep the growth momentum going, and may therefore not be in a hurry to raise interest rates.

This group of economists was of the view that inflation is likely to dip in the second half of the year due to the high base effect in the same period last year.

Also, if the monsoon this year is good as forecast, the inflationary pressure would ease. RBI can therefore be expected to act keeping in mind the liquidity situation and this should mean some pause in policy action.

Further, the surveyed economists have ruled out the possibility of any hit on India’s overall exports if the crisis remains restricted to Greece, as India’s exports to this affected country accounts for just 1 to 2 per cent of its overall global exports.

However, a generalised and widespread slowdown in the EU region, as expected by a few, would be a negative development for Indian exports as EU region accounts for about a fifth of our total global exports.

An additional point towards which attention was drawn relates to availability of trade finance in the EU region. As banks in the EU region suffer losses, they could well cut down on their overall operations including the business of trade finance and in case this happens then like all countries India too would see a slowdown in exports to the EU region.

A small set of economists have said this slowdown in exports could shave off about 0.25 to 0.5 per centage points from India’s GDP growth in the year 2010-11.

On the question of whether sovereign debt crisis of Greece could spill over to other nations, the majority view was that ring fencing of the Greece problem may prove to be a challenging task and that there is a good chance that other vulnerable economies in the region such as Portugal, Spain and Ireland may face a situation similar to that of Greece given their already weak public finances.

Economists have also pointed out that countries like France could also come under some pressure as the country’s banking sector has large exposure to some of the above mentioned countries.

As per the survey, the chance of the crisis spreading to other European countries through the banking channel is higher as the risk of default is the most crucial issue at this stage.

Notably, foreign banks are exposed to the tune of 236.2 billion dollars of public and private debt in Greece and nearly a third of this is held by French Banks.

Most economists also ruled out the possibility of a double dip recession due to Greece debt crisis. They however agreed that the global economy could see a situation of ‘below to average growth rate’ in the short to medium term owing to the reduction in growth in the Euro zone.


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