Greece crisis: How will it affect the Indian economy?

Mumbai: Domestic equity benchmarks on June 29 made a sharp recovery from a major crash, which was in sync with the trend witnessed in other Asian and European markets, as investors shunned stocks globally on fear of Greece defaulting on its loans and eventually exiting the euro zone.

But India’s policymakers have ruled out any direct impact from the Greece crisis on the broader economy.

BSE benchmark Sensex did make a remarkable 430-point recovery — largely on the back of short covering — but still ended down.

Bond prices and the rupee too fell in line with the contagion across asset classes. The rupee weakened by 26 paise against the dollar to 63.90, which also added to the market’s woes.

 “It’s a dynamic situation,” said finance secretary Rajiv Mehrishi. “To the extent it affects the euro, there might be some indirect impact. If yields on euro bonds go up, it might impact inflows and trigger outflows from India. Nobody can predict what the exact situation would be,” he said.

The BSE Sensex plunged 450 points in Monday’s opening session and then fell another 150 points in intra-day trade, before managing a solid recovery in the second half even when almost every other Asian and European market ended 2 to 3.5 per cent lower.

The 30-stock pack finally closed 167 points lower at 27,645.15. The NSE Nifty dipped below the 8,200 mark, then recovered some of the losses to close at 8,318.40, down 62.70 points or 0.75 per cent.

The selloff was triggered by a breakdown in the weekend talks between Greece and its creditors, which made it look almost certain that Athens was going to default on its obligations towards IMF on Tuesday. Panic spread as Greece shut down its banking system, ordering lenders to stay closed for six days to avoid a run on the banks.

“If the contagion spreads to emerging markets, India’s financial markets may take a knock. If rising risk aversion leads to a flight to safety and causes substantial portfolio outflows, that would impact exchange rates,” said Aditi Nayar, senior economist at ICRA.

“From India’s point of view, our markets will witness little less volatility than its peers as we are least impacted from the unfolding events in Greece and the EU,” said Nilesh Shah, managing director of Kotak Mutual Fund.

Economist at Yes Bank, Prakriti Shukla, said an adverse spillover impact is likely to remain contained as India does not have any direct banking exposure to Greece. Greece has an 1.14 per cent and 0.03 per cent shares of India’s export and import baskets, respectively, she said.

European stocks traded sharply down with key indices in Germany, France and the UK losing between 1.50 per cent and 3.31 per cent. Asian indices from China, Hong Kong, Japan, Singapore, South Korea and Taiwan were all down between 1.42 per cent and 3.30 per cent.

The worldwide selloff in financial assets in search of security will lead to a strengthening of the US bonds, which will in turn strengthen the dollar against a basket of currencies, India Ratings chief economist Devendra Kumar Pant said. An expensive US dollar and the fear of another slowdown would, however, drive international commodity prices down, which may benefit India, he said.

“Looking at the situation in Greece, investors will like to take some risk off the table and sit on the sidelines and that is what is happening to the global equities,” says Andrew Holland, CEO of Ambit Capital. However, sharp cut prices in this volatile period could be offering some buying opportunity, he added.

Foreign funds, who was were net seller of over Rs 4,984 crore in equity so far in June, sold Rs 711 crore worth of shares on Monday. However, FIIs have been net buyers in the debt market in June to the tune of Rs 1,851 crore, according to the NSDL data.

“There is not too much panic in the market, as investors were prepared for this kind of an event. There may be a correction but in a controlled manner… It is difficult to say how things will play out over the next few days,” says Anup Maheshwari, executive vice-president and head of equities, DSP BlackRock Investment Managers.