Indian Economy: Growth -3

[sumishi]

[size="3"][url="http://economictimes.indiatimes.com/features/financial-times/how-will-the-euro-zone-crisis-impact-india/articleshow/10284983.cms"]Euro zone crisis behind market volatility[/url] : ET, 9 Oct, 2011



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The markets are swaying to the ripple effect of developments across the globe. The domestic economy, growth and inflation numbers are struggling to cope with the consequences of wars, turmoil and economic crisis of nations miles away.



After the American subprime crisis that began with the bursting of the US housing bubble, the Euro zone crisis is the next big cause of concern for global economies. The US subprime mortgage crisis saw rise in sub-prime mortgage defaults and foreclosures. This resulted in a decline in securities backed by mortgages . The current Euro zone crisis threatens to impact economies of even nations with a robust domestic growth.



The severe debt crisis in Euro zone nations could spill over, affecting the financial health of developed economies and impeding the economic recovery of developing nations. The soaring international oil price has added fuel to the fire.



How will the Euro zone crisis impact India?



Capital flows into the economy and exports are likely to take a beating. Foreign institutional investor (FII) investment pattern is marked with high volatility. A sudden surge in investment pattern is as detrimental as an unannounced withdrawal. A surge in FII investments will lead to increased inflationary pressures and building of an asset bubble that could burst anytime.



India is grappling with high inflation and the central bank has raised the key interest rates a dozen times in the past year and a half. Now, the possibility of Greek debt default affecting the European banking and financial sectors is very real. The crisis is expected to spill over to the other European nations that otherwise appear economically stable.



While Greece has embarked on austerity measures, the bailout package from the European Union and IMF funds is expected to help it navigate out of its crisis. However, a rapidly shrinking Greek economy needs a fresh lease of life. But if Greece is only the beginning, then the Euro zone crisis could avalanche into larger trouble.



The quantum of impact of Euro zone crisis on markets here is yet to be measured. A slump in domestic industrial growth, unaddressed agricultural woes, rising interest rates and escalating fuel costs have compounded the global factors. A series of scandals emerging from under the carpet have diluted the faith of foreign investors.



The market volatility has compounded with the concerns of small investors. Sectors across the board including auto, oil and gas, metal, FMCG and healthcare took a beating. Concerns are the current European financial crisis will curb economic growth. The risk associated with otherwise favorite sectors such as banking has increased.



Investors have to study global trends before investing in the unpredictable stock markets today. Have a long-term perspective when taking investment decisions.

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