How a Grexit will impact the Indian economy

Lokeshwarri SKBL Research Bureau Updated - January 24, 2018 at 03:00 AM.

Rupee likely to be hit, exporters to Euro Zone may see margins dipping

GREECE_Tsipras

Financial markets will be in a state of heightened suspense till the end of the month, when Greece is expected to pay about €1.5 billion or $1.7 billion to the IMF.

Earlier this week, Greek Prime Minister Tsipras had proposed a deal to the creditors that included tax increases on wealthy individuals and companies. But with creditors not too impressed with the offer, Tsipras will have to agree to further austerity measures and increases in taxes or let the country default. Over the next week, it will be evident if this drama comes to an end with the exit of Greece from the euro zone or if another deal is cobbled together that lets the country carry on in its current indebted state. So, how will a Greece default, if it happens, impact India?

Impact on rupee

The direct impact of a Grexit will be on the Indian rupee. With global risk aversion rising in the aftermath of the event, the euro is likely to fall. The European currency has already lost 17 per cent against the dollar since March 2014 due to the ongoing quantitative easing of the European Central Bank. It can plunge further in a knee-jerk reaction moving close to its recent low at $1.04 a piece or even below, to $1.00. A weaker euro and a stronger dollar will impact the rupee’s value. Bond investors, who are the first to pull money out, will flee from riskier assets such as emerging markets bonds to treasury securities in their home country. This could hurt the rupee.

But the impact on the Indian currency is not likely to be too severe as it has been among the most resilient so far this year. The RBI can let it decline to 65 or 66. But if there is fear of greater fall, the central bank is likely to sell dollars to support the currency. The recent build-up in foreign currency reserves to $354 billion will come in handy in this scenario.

On exports

Grexit will hit the euro in the near term. But over the long term, the euro could emerge stronger with the exit of a country with a debt-to-GDP ratio 175 per cent. Greece will also be better off outside the euro zone, with the freedom to let its currency depreciate. This will not only help Greek companies but will also boost tourism that contributes almost 18 per cent to its GDP.

But Indian exporters are not going to be too happy with the short-term weakness in the euro. Europe accounts for about 17 per cent of Indian exports and exporters who cater to this significant market will see their margins eroding.

Debt denominated in euro

Companies that have raised overseas debt in euros will also get some temporary relief as euro weakness will reduce the outstanding loan obligations. But given that euro denominated external debt is only 2.9 per cent of the total external debt as on December 2014, the impact is not likely to be significant.

On stock market

Indian stocks could decline in a reaction in global risk-off trade. But the impact may not last too long as this event has been in the news long enough and would have been factored in.

Published on June 24, 2015 17:26