Greece crisis – 2: Its affect on India

My apologies to the readers who were looking forward to the next article on Greece crisis; I had other commitments to fulfill.

My earlier article talked about the factors that were responsible for the Greece crisis. Here I am going to talk about how this financial crisis can affect India.

India does not have much exposure to Greece; however the Greece crisis might have ripple effect on many economies around the world, India being one of them.

Software and engineering exports-

India’s software and engineering exports may take a hit as European Union is the largest destination for such shipments. These industries may experience an indirect impact from the UK, Italy, Turkey and France.

Capital outflow-

Given the financial crisis, the Greece government is expected to increase the interest rate, which may trigger capital outflows from India. But how does an increase in interest rate lead to capital outflow? It’s a domino effect. Higher interest rate essentially means higher returns on investment. This makes the economy more attractive to the foreign investors (FDI). So, higher interest rates in Greece will make it more attractive to foreign investors to invest in their economy. This will divert/deviate foreign investors who have invested (or want to invest) in India to move to Greece seeking higher returns thus, resulting in capital outflow from India to Greece.

Depreciation of rupee-

Investors investing more in Greece would essentially mean that the demand for Greece currency, Euro, will increase and the demand for Indian rupee will decrease (due to capital outflow). This is where money-market dynamics will come into play. An increase in demand for Euro will make it costlier than Indian rupee. Thus, Indian rupee may depreciate.

India may not have major entanglement with Greece economy but the crisis will definitely hit India.

Now the next question is – how well prepared are we this time?

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