Chief Economic Advisor Arvind Subramanian said on Monday that though India is relatively well-insulated from the Greece situation but since it was likely to impact the U.S. Fed’s impending decision on a rate hike, it could cause flight of foreign investments which would affect the rupee.
Dr. Subramanian cautioned that as the crisis plays out ‘financial markets are going to be volatile’ and both the European Central Bank and the U.S. Fed will take this into account.
Some market volatility for a day or two should be expected, the CEA told reporters on Monday. “In these situations what mostly happens is there is flight to dollars, to a safe haven… Rupee might also be affected by that…. But nothing gets unusual at all so far.”
Dr. Subramanian said that India is well-protected in at least three ways — the macroeconomic situation is more stable, there is a buffer of foreign exchange reserves and the economy is still a very attractive investment destination.
“This is a drama which is going to play out for sometime… So I think we are relatively well insulated,” he said.
India’s forex reserves reached a record high of $355.46 billion as of June 19.
The CEA said that the crisis was likely to be prolonged but it was up to Europe to respond.
The ‘big’ meeting of the German and the French heads of the states, likely to take place on Tuesday, should be watched, he said.
In a referendum on Sunday, Greeks rejected a debt relief package offer from its international creditors, raising doubts of the future of Greece’s membership of the European Union.
Union Finance Secretary Rajiv Mehrishi said Government is closely monitoring the situation as India may be indirectly impacted.
“We will have to see how the Euro moves now… We are closely monitoring the Greece situation… There could be some reaction on the Fed rate hike likely,” he said.
