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Will Greece debt crisis have an indirect impact on Indian economy?

30-June-2015
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Will Greece debt crisis have an indirect impact on Indian economy?

The economic crisis in Greece has sent ripples in markets across the globe amidst fears of the impact of its parting away from the Euro currency and possibly an end of its association with the European Union (EU) after talks broke down between the Greek government and creditors. This was because the Greece government did not agree to the terms of the creditors in extending the credit line and restructuring of the debts. This means an impending case of a default on the June 30th deadline to repay the debts. In fact the government has chosen to have a referendum on the issue. The decision by the Greek government to close their banks for six days starting Monday and impose strict limits on ATM withdrawal fuelled more fears of a cascading effect in the European economy.

The stock markets in India early on Monday reacted sharply over this news with the BSE Sensex falling over 602 points and the NSE Nifty dipping below the 8,200 points mark. The markets however managed to recover by the end of the day as the BSE Sensex closed 0.60% down with a loss of 167 points, while NSE Nifty closed at 63 points below a loss of 0.75%.

The reason for this is the fear of a cascading effect of global economies which means it could have an impact in India too. The referendum will see Greek citizens deciding whether they would want to continue to be a part of the EU or no. If their decision is to exit the EU, it will not only be the first country to exit, but will also consequently have an effect on the Euro currency. The fall of the currency could eventually have further divesting effects on other member nations of the Union. The lowering of the currency value would lead to higher value of imports and lesser value of exports for EU nations, which could see other EU member nations taking a hit in their revenues. These include countries such as Portugal and Spain which had similar issues as Greece and had to be bailed out a few years ago. It could see these countries facing issues if their revenues especially from exports get squeezed. If revenues of EU member nations decline it could see a reduction in imports from other countries, India being one of them. India being an export driven economy with Europe a key market could face see a reduction in exports and hence hurting valuable export driven revenues and the economy.        

Finance Secretary, Rajiv Mehrishi also on Monday said the Greek crisis there may be some indirect effect via Europe on capital inflow and outflow. “Greece crisis does not have any effect on India. (But) interest rate may firm up in Europe. In case of firming up of interest rates in Europe, there can be outflow of capital from India,” he said in a media report. He further added, “If yields on Euro bonds go up, then it might impact inflows and outflows from India.”

Greece’s debt extends to Euro 312 billion which has to be repaid to various creditors. Out of this Euro 1.5 billion ($1.7 billion) which is 7% of the total debt and has to be paid to the International Monetary Fund (IMF) by June 30 for which it is expected to consequently default on. Some of the other creditors include 42% to ESFS loans, 17% to Euro-area member loans, 13% to privately held bonds, 6% to bonds held by ECB, etc.     

In the global economy one nation’s downfall can lead to a domino effect. In the same way that the credit crisis in the US had an effect on India and the globe, this issue could have much more disastrous effects. However, the government and the Reserve Bank of India seem to have a firm eye on the issue and are looking at steps to offset any impact in the country.    

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