Euro storm

Jun 12, 2012, 07:23 IST | Alex K Mathews

Countries around the world are concerned about the Euro debt crisis. Italy, Spain, Greece and Portugal are worse hit by the crisis. If Greece exits Euro, then other Eurozone countries too will be in trouble.

Various countries have already started strategising in case a situation arises. Last week, we saw Australia, China, etcetera reducing interest rates to spur growth. The Reserve Bank of Australia slashed its key interest rate by 0.25 per cent to 3.5 per cent citing reasons that economic growth in the nation was slow; largely as a result of declining demand around the globe particularly from China. In India, HSBC’s services PMI rose almost two points to 54.7 in May from 52.8 in April and the index measuring business expectations jumped to a 15-month high of 76.7 last month from 73.8 in April. However, GDP numbers along with various other factors might convince the RBI in India to cut repo rates and even the CRR rates in its upcoming monetary review on June 17.

Concern: The Euro crisis

The government of India is desperately trying to bring forth reforms, but being a coalition government there are a few challenges. Last week, the government unveiled a seven-point strategy to boost exports. This includes extension of interest subsidy scheme by one year till March 31, 2013 for labour-intensive sectors namely toys, sports goods, processed agricultural products and readymade garments. The Finance Ministry is examining a proposal to hike excise duty on diesel cars in order to reduce the consumption of subsidised fuel by car and SUV owners.
The diesel car manufacturers want the government to drop such a decision and have warned that it will have a negative impact on the industry. Due to the steep rise in petrol price, Maruti Suzuki had decided to reduce production of petrol cars and increase production of diesel car. But, if diesel prices are increased, it will affect the industry.

The Prime Minister, in a recent meeting, had said that the debt crisis in Europe has affected our export industry as well as capital inflows into equity and debt markets. Europe is the biggest destination for Indian goods. Last week, Morgan Stanley scaled down its FY13 India growth forecast to 5.8 per cent, the lowest estimate so far.

According to chief economic advisor Kaushik Basu, India does have a contingency plan in place to tackle Europe and the RBI is also ready to implement monetary and fiscal measure to insulate India from the shockwaves arising from the European crisis. The measure may include reduction in interest rates or even a CRR cut. Europe has remained a concern for some time now. The G-7 finance ministers met last week and reached a consensus that they will work together to help Spain and Greece. Spain may receive a precautionary credit line from the European Financial Stability Facility (EFSF). ECB official met and its President Mario Draghi said that they have kept the interest rates unchanged at 1 per cent, leaving the doors open for a rate cut at the right time. The Bank of Canada held its key rate at 1 per cent and the Bank of England held interest rates unchanged at 0.5 per cent and left quantitative easing unchanged at Euro 325 bln.

Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended. Feel free to e-mail him at Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

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