Greek crisis and injured Euro zone may cause capital outflows from India

The Greek crisis whatever turn it may take in the coming days will start adversely affecting India.  Much of the Greek effect will be on the stock market –producing turbulence. European institutional investors may exit from even profit scenarios in the EMEs including India to cover up liquidity shortage in their home countries.

It is estimated that many European investors may undergo liquidity squeeze out from a worst case scenario of a Greek default. Similarly, a rise in yield in EU bonds may attract more speculative capital away from the EMEs to the Eurozone.

Even if Athens doesn’t default, the liquidity shortage and rise in the yield of Euro zone bonds may drive away some part of stock market liquidity in India.

 History of small shocks indicates that market turbulence is inevitable. Signals are strong that one week is not good for EMEs. Exit of investors may drag currencies down, depending upon the depth of the stalemate.

Finance Secretary Rajiv Mehrishi told reporters that the crisis may produce aome adverse effect on India in the form of capital flows. “Greece criss does not have any effect directly on India. (But) interest rate may firm up in Europe. In case of firming up of interest rate in Europe, there can be outflow of capital from India,” Mehrishi observed.

Next one week will see the Greek problem growing into a global issue. This is usual to any crisis in a highly interconnected world, though Greece is a small economy in the Euro zone. 


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