New Delhi : India is monitoring developments in Greece after breakdown of talks between its government and creditors, but does not have concrete plans at present to deal with the impact of the crisis, Finance Secretary Rajiv Mehrishi said on Monday.
However, the central government was in touch with the Reserve Bank of India (RBI) to deal with any untoward situation, he added.
“This a dynamic and evolving situation. There is no firm plan that we can access. Nobody can predict what the exact situation would be,” Mehrishi told reporters here.
Worries over Greece sparked a sell-off in emerging markets on Monday. In India, the sensitive index (Sensex) of the Bombay Stock Exchange (BSE) fell by 602.65 points in intra-day trade, the Nifty fell as much as 2.2 percent, while the benchmark 10-year bond yield touched its highest since May 22.
Mehrishi said the fallout from Greece would not have a direct impact on India but flows would be a potential concern.
“If yields on euro bonds go up, it might impact inflows and outflows from India,” he said.
Indian industry feels that if Greece defaulted on its debt obligations and a crisis developed for Europe as a result, India too could feel the tremors like the rest of the world.
“What is worrying is that the overall situation with regard to India’s merchandise exports does not look promising this year and the troubles in Europe could only deteriorate the prospects,” Associated Chambers of Commerce and Industry of India (Assocham) said in a statement here.
“There is a need for RBI and the finance ministry to keep a close eye on the muddy global situation and its possible effect on India’s capital flows and the currency movement,” the industry body added.
India’s merchandise exports continued to decline for the second month this fiscal, down by over 20 percent at $22.35 billion in May from $27.99 billion in the same month of previous year, official data showed earlier this month.
The Federation of Indian Export Organisations (FIEO) warned on Saturday that the continuing decline in exports would result in layoffs, besides putting pressure on the current account deficit (CAD).
Agreeing with RBI Governor Raghuram Rajan’s recent remarks that the central banks globally were at risk of slipping into the kind of beggar-thy-neighbour strategies, leading to the Great Depression of the 1930s again, FIEO president S.C. Ralhan said that based on the current order booking position, he was apprehensive that the Indian exports might significantly decline in volume in the months ahead, resulting in job layoffs.
The strategy of “making a beggar out of neighbouring nations” normally involves increasing the demand for one’s exports by devaluing the nation’s currency to make the exports to other countries cheaper.
“I do worry that we are slowly slipping into the kind of problems that we had in the thirties in attempts to activate growth,” Rajan said, speaking at the London Business School last week.
Pointing to the very low interest rate policies of the US Federal Reserve, Bank of Japan and Bank of England in a bid to stimulate their respective economies, Rajan has been warning that emerging markets are especially vulnerable to big shifts in capital flows triggered by unprecedented monetary accommodation in rich countries.
Elaborating on the RBI’s policy stance at the time it left interest rates unchanged during its bi-monthly monetary policy review in February, Deputy Governor Urjit Patel described the “important backdrop” to the central bank’s move.
“We are in the midst of an age of competitive depreciation and of a beggar-my-neighbour philosophy. It brings to mind an old African saying that when elephants fight the grass suffers,” Patel had said.
“While the ECB (European Central Bank) and Bank of Japan are printing money and devaluing their currencies on one hand, the US economy is reviving on the other. Anyone in the middle is getting crushed,” he added.