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India may gain from moderate debt crisis in Europe: Basu

business Updated: May 09, 2010 13:12 IST
Chief economic advisor Kaushik Basu

Chief economic advisor Kaushik Basu has said the ongoing sovereign debt crisis in Europe may, in fact, turn advantageous for the country's capital markets if it is contained at the present level.

But if the crisis snowballs into an overall global meltdown, then we cannot remain immune to its impact as the
country is now integrated with the world, Basu told PTI in an interview.

"If a crisis in another industrialised country is a relatively small crisis, in fact, we get some very unusual
advantage. More money flows into India," Basu said, adding people look for safer havens to park their money.

However, if the trouble gets very big, people get nervous about the world economy itself and there may be an outflow of
money as people then put money into gold and other assets, rather than into stock markets anywhere in the world, he
pointed out.

Basu's views are corroborated to a large extent by the movement of foreign capital into the country since the start
of 2010, the time when fears of sovereign debt crisis in Europe, particularly in Greece, began to come appear.

There was net inflow of foreign institutional funds into the domestic capital markets since the start of 2010 till
April-end, which was Rs 54,606 crore and the stock market barometer Sensex rose 93.9 points in the four months to close at 17,558.71 on April 30.

The fears of worsening crisis, however, led to the announcement of a massive USD 147-billion bailout package for
the debt-stricken Greece last week by the Eurozone nations and the International Monetary Fund. And following this the
domestic market, too, started feeling the heat and began to tumble down.

The domestic markets got battered last week as sentiment was hit due to the reports of worsening sovereign
debt crisis in two other EU nations-- Portugal and Spain-- on the one hand and the Greek problem escalated on the other.

The Sensex fell all the five days last week, shedding a whopping 789.6 points to close at 16,769.11 on Friday, 4.5 per
cent down over the preceding week.

In the first week of May, the FIIs were net sellers in the market, decreasing their exposure by Rs 840 crore. Though
the net outflow may not be large, the impact on the domestic market was massive.