As we write the debt crisis in Greece has worsened. Greece has to make payments to international creditors by June 30, which is just a few days from now and it does not have the money.
German Chancellor Angela Merkel said, "We still haven't made the necessary progress; in some places it looks like we're even going backwards."
Greece has been asked by its creditors to make spending cuts so as to enable lenders unlock the final €7.2bn tranche of bailout funds. If it receives these funds it can pay-off existing loans for which payments are due.
Greece and its lenders have not agreed on how they could move forward, with the Greece government very reluctant to make cuts to pensions. Saturday when the Eurozone leaders meet would be crucial for the fate of Greece in the Eurozone.
Let us understand the impact of the Greece Eurozone exit on India, if that were to ever happen
1) Impact on the rupee
The first thing that always takes a hit is the currency. For one there would be an immediate sentimental impact on the rupee. There could be some selling pressure by Foreign Portfolio Investors in the stock market if the unfortunate event happens, which could mean dollar demand from them and hence pressure on the currency.
2) Stock market impact
Unlike the Lehman crisis which suddenly erupted, this event is known. So, markets would perhaps be better prepared for the same. At the most there maybe some sentimental impact on the Sensex and the Nifty for a few days. Beyond that there might not be a collateral damage.
India's exports to Greece is minimal. So, to that extent there might not be any severe losses on the export front.
4) Imports could get expensive
If the rupee falls sharply, it could make imports costlier, particularly oil imports. This could lead to a spike in inflation.
5) Spike in inflation
If imported crude gets expensive it could lead to a spike in inflation and eventually the RBI holding interest rates steady.
6) Not good news on interest rate front
If imported inflation rises, it is not good news, since the RBI would hold interest rates or even hike them if the damage on the rupee is severe.
We have worked on the assumption that Greece would exit the Eurozone. It is an uncertain event, but, as seen in the past there is a likelihood of a last minute deal being struck. One has to wait and watch what happens, especially on Saturday.