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Greek shadow on India rates

What does the Greek crisis mean for India? It depends on who you are talking to. While Chief Economic Advisor Kaushik Basu says this could eventually attract foreign funds inflow into a stronger economy in India, Deputy Governor of the RBI, Subir Gokarn, speaks mainly of short-term market volatility. Sandeep Singh reports.

business Updated: May 12, 2010 01:49 IST
Sandeep Singh

What does the Greek crisis mean for India? It depends on who you are talking to. While Chief Economic Advisor Kaushik Basu says this could eventually attract foreign funds inflow into a stronger economy in India, Deputy Governor of the Reserve Bank of India, Subir Gokarn, speaks mainly of short-term market volatility.

A third view is now emerging, that India may be immune to the pains in Greece and other European nations, but its after-effects could lead to a scenario where interest rates may harden for Indian companies borrowing abroad.

“We are more vulnerable to these external factors than we like to believe. Given the way the credit default swap (CDS) spreads are going up abroad there will be a flow back of demand to the domestic side as it will become more expensive for companies to borrow abroad,” said Jimmy Tata, head-corporate banking, HDFC Bank.

What this means is that firms that otherwise go for overseas loans may be switching towards domestic borrowings, putting pressure on internal rates.

“If the problem continues and Indian companies shift their borrowing domestically then this may lead to a rise in interest rates,” said Ashvin Parekh, national head, financial services, Ernst & Young.

However, this is not an immediate concern as liquidity is ample. “As of now, companies are not raising too much funds for capital expenditure and the liquidity is ample so even if companies shift to domestic borrowing, it will not impact much,” said the head of a mutual fund on conditions of anonymity.

But liquidity and interest rates could face a tighter situation if the problem persists.

Yo-yo Sensex loses steam

After beginning the week with a 651-point rally, the benchmark Sensex of Bombay Stock Exchange ended down 189 points, or 1.1 per cent, on Tuesday. Market players attributed the fall to global cues and selling by institutions.

“Concerns over China and Greece have been playing the market on a daily basis. This, along with selling by institutional investors pulled down markets today,” said Dinesh Thakkar, chairman and MD, Angel Broking.

The Sensex ended at 17,141 points while the S&P CNX Nifty fell 57 points to 5,136.15 points.

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