Effects of Euro Zone Crisis on India
The euro zone crisis has cast its spell on the growth sectors of India. Because of the crisis, flows into exports and the economy have taken a slump and the sudden surge of FII (Foreign Institutional Investor) has left the country grappling with high rates of inflation. To add to the predicaments, the Central Bank has increased key interest rates as well.
Also, the possibility of Greek defaulting on its dent payment which will affect the European financial and banking sectors is real. The quantum impact of the crisis on the markets in India is not yet known and while this is the case, there are some effects that are quite evident. Some of these include unaddressed agricultural problems, slump in domestic growth (industrial), rising fuel costs and increasing interest rates. In a nutshell, these effects can be listed as below:
- Rupee depreciation-Europe’s slow growth has coaxed most of the investor into investing in the United States dollar. Because investors are taking refuge in the US dollar, it has appreciated when compared to the currencies of other countries across the globe. The Indian rupee is under immense pressure as a result of dropping exports which are coupled with increasing crude oil costs causing it to depreciate in respect to the United States dollar.
- Slowdown in service and manufacturing sectors-Demand for services and goods from China has gone down considerably as a result of contraction of the American and European markets. Product costs have sky rocketed as a result of inflationary pressure consequently, discoursing consumers.
- Cash hoarding-The crisis has forced a large number of the Indian farms to cut down on expansion. This is in a bid to hold and save their cash for paying off loan debts and protecting them from the worst financial crunches.
- Market visibility-The volatility of the global financial markets has also impacted the financial markets in India as well. The Reserve Bank of India has been forced to raise interest rates as a result of high inflation. The prices of silver and gold have also spiraled up and this has further helped push the rate of inflation higher.
Market volatility in India has compounded with concerns from the small investors. Some of the sectors that have suffered the worst brunt of the euro crisis include the metal, auto, gas, oil, healthcare and FMCG. There have been concerns that the crisis will impede economic growth and the risks associated with some of the favorite sectors like banking have also increased.
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