Europe Crisis

The crisis in Greece does not in itself pose an economic risk for Indian investors and traders, but a Europe-wide crisis would. Elaborate. (200 Words)

Greece became the first advanced economy to default on its debts. Greek crisis and a possible “Grexit” will not have direct repercussions on India but its negative fallout on the European Union as a whole may impact India adversely because Europe is India’s largest trading partner.
  1. Economic contagion: Default would mean a huge loss for European Central Bank and a weaker Euro. Weaker Euro will cause interest rates to firm up which will eventually lead to outflow of capital from India.
  2. Exports: Software and engineering exports, a major share of India’s trade with EU, is expected to fall.
  3. Volatile stock market due to heavy speculation would hurt investors in the short-run.
  4. Bigger problem is the political fallout of a “Grexit” which would send a negative message that euro membership is reversible and shore up further anti-euro movements and thus resulting in a vicious cycle.
Nevertheless, India is better prepared to deal with any negative impact on its economy:
  1. Strong macroeconomic fundamentals (policies to contain inflation, spur investments and growth) to deal with global slowdown.
  2. US Fed might not hike up rates immediately in the event of grexit and that would check flight of dollars.
  3. Forex reserves with RBI to counter-balance the currency volatility.
Critically examine the effects of ongoing economic crisis in Greece on the Indian economy. (200 Words)
Greece is on the verge of a default in its loan repayment to IMF. This is a serious economic problem as Greece may exit the Eurozone and this will have a major fallout in the world economy. Euro will take a direct hit and the viability of the currency may be in doubt as other highly indebted countries such as Italy and Portugal may follow suit.
India is also in the line of fire. The following may be effects on Indian economy-
  1. Though Indian economy has little transaction with Greece, European banks have high stakes in the Greek economy. As they have a high exposure to India, Indian economy will also be hit.
  2. Indian economy is already experiencing a rough patch due to US Federal Reserve tapering and subdued monsoon predictions. The Greek economic crisis will further put burden on Indian economy.
  3. There may be capital flight from India, in case there is an increase in interest rates in Europe . However, RBI is in a good position of tackling any currency volatility due to its record Foreign Reserves at the moment.
  4. Indian businesses dealing in Euro will face losses as Euro will become weaker. Also, the Indian manufacturing will take a hit as demand will be lower in Eurozone which is a major trading partner of India.
  5. As euro value decreases, it’s export potential increases. A high export potential will attract investment. A potential outflow from Indian market can happen which will reduce rupee value.
Indian economy though is much prepared now to face any such consequence. High foreign exchange reserves will aid to restring balance and stabilising rupee value. Moreover, Indian rupee is currently overvalued compared to other currencies and hence any devaluation is not unwarranted. It will even boost exports. So, any eventuality is not a cause of concern for India.



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