Greek tragedy unlikely to have an impact on India
The Indian financial markets would largely remain insulated as the capacity of Greece, as a tiny economy, to overwhelm India’s strong fundamentals is negligible.
With Greece informally turning its back on the Eurozone, its implications on Asian economies would be felt in varying degrees, with India in a more healthy position to offset the potential impact. “India’s macroeconomic fundamentals have improved in the last 18 months, helped by Prime Minister Narendra Modi’s more decisive economic leadership with early signs of economic recovery underway,” says Rajiv Biswas, Asia-Pacific chief economist, IHS Global. He added that the “Indian rupee (INR) has shown considerable stability since RBI Governor Raghuram Rajan took office in September 2013, with FX reserves rebuilt and now at a new record high of USD 355 billion.” However India’s falling exports may keep its reliance on dollars intact to fund its chronic current account deficit and therefore, any potential capital outflow from India might lead to a further turmoil in its financial markets.
With a total debt burden of over 300 billion Euros, Greece defaulted on its 1.6 billion Euros owed to the International Monetary Fund (IMF) last Tuesday, and has called for a referendum today to seek popular opinion whether to accept or decline the harsh fiscal conditions that its creditors — the troika consisting of the European Central Bank, the European Union and the IMF — have attached with the bailout money. The troika wants Greece to raise more taxes and cuts its wages and pension bill as a pre-condition to receive further loans from the troika. Greece, however, feels that the fiscal austerity imposed on it by the troika has already brought its economy on its knees and imposing further austerity would heighten the ongoing pain on the people, about 25% of whom are already unemployed. While the Sunday’s referendum is not a vote on Greece’s euro membership but IHS global believes that, “in practice, it is”.
Many still expect Greece and troika to reach some kind of deal even after the Sunday’s referendum. If Greece does decide to part its ways from the Eurozone, then global financial markets would certainly become volatile as the risk of the Greece-exit has not been factored in fully by the global markets. “But such volatility would only be for a short period of time,” says Phani Sekhar, Fund Manager, Karvy Capital. He says that the Indian financial markets as well as the Rupee might feel the resultant turbulence but it would largely remain insulated since the capacity of Greece, as a tiny economy ( just 2% of Euro Zone), to overwhelm India’s strong fundamentals is negligible.
However, if the other indebted nations like Spain, Italy and Portugal also decide to exit from the Eurozone then a protracted turmoil is surely to hit the global financial market. This would impact growth in Asian economies besides depressing oil prices further.