May 3: The stability of the global stock markets has been hostage to the uncertainty over the outcome of the Greek sovereign debt crisis.
Market watchers opine that while India would not suffer directly from a Euro-zone crisis, the indirect impact could be severe.
Indian market has been rising primarily on money brought in by the foreign investors. A crisis of confidence can cut these inflows hurting Indian markets and investors.
On Monday, markets around the world and in India took a beating as the sovereign debt crisis affected countries such as Portugal, Ireland, Italy, Greece, and Spain known by the acronym of PIIGS.
When it looks like there could be a bail out possible for the Greek government, the markets perked up, but tanked when the bail out looked uncertain.
This has been happening with regularity and last Thursday the Sensex tanked over 300 points when it got a hint that the bail-out plan was not working out.
Markets have reacted negatively despite the Indian banking system, unlike the European banking system has minimal exposure to the PIIGS countries.
The total exposure of Indian banks to the PIIGS is estimated at just about $1 billion against the overall banking system assets of $1.1trillion in India according to a study by Execution Noble.
India’s exposure to the European banking system is mainly through British and American banks whose claims on the French and German banking system are sizeable, it says.
So should Indian investors be worried? Not really. The PIIGS account for only 4.4 per cent of India’s exports and for only one per cent of its FDI flows.
Hence the direct impact of the economic challenges in those countries on India is minimal. Listed companies having exports to these countries could be have an impact. However, it is through the FII inflows that the Indian markets and investors can be in trouble.
FII inflows are the mainstay of the Indian stock exchanges and if the sovereign debt challenges in Europe are allowed to escalate, there will be a flight of capital by the FIIs to the safety of the US treasury.
This will effect India as the domestic mutual funds are net sellers and cannot replace the FIIs. Equity raising gets impacted which in turn affects the capex spending of India Inc.