The Greek referendum has gone against the austerity measures imposed by creditors, putting the euro zone in a new predicament. Chances are high that Greece may exit from the euro if a new deal is not put in place quickly, to fund the country’s banks.
Even if Greece does not exit the euro, a solution to its crisis may not be coming any time soon as other euro member nations may not want the terms of a bailout deal to be relaxed more. This is bound to lead to protracted uncertainty in the euro zone and the global markets.
From a capital market perspective, it could also mean monetary policy can remain loose for longer as central banks in developed countries would be cautious about raising rates amid such uncertainty, which may hinder global economic recovery.
A contagion to other economies does not appear a big risk. Unlike 2012, when private institutions held Greek debt at the time the crisis unfolded, this time it is public institutions such as IMF and European Central Bank that hold these debts. Second, euro zone countries have improved their macro-economic positions and are in better shape.
As long as the euro zone does find a solution, or the crisis does not spread to bigger economies such as Spain and Italy, the after-effects of this crisis will be limited as Greece is a relatively small part of the global economy.
India’s macroeconomic fundamentals have significantly improved from 2012-13, with reduced external vulnerability (the current-account deficit is less than 1.5%), lower fiscal deficit and benign inflation.
In fact, Indian equity has proved resilient despite global market volatility. The Nifty has been one of the least impacted indices globally, and suggests investors are allocating to financial assets on a consistent basis.
Pending a final outcome on Greece, bouts of volatility are inevitable. The worst case could be catastrophic for Greece in the short run, and some risk-off trade could take place globally.
For India, insulated from Greece, the good news is that oil prices have begun to fall again. The coming earnings season and the progress of the monsoon are more important triggers from the domestic perspective.
Hence, any volatility and market reactions could prove to be good buying opportunities in both equity and debt funds. Investors with a medium- to long-term view need not worry about the Greece issue.
The writer is MD and CEO, ICICI Prudential Mutual Fund. Views expressed are personal.