How a Greek Exit From the Euro Would Affect India

The big event in global markets this week—Greece and its upcoming referendum on another bailout deal —isn’t likely to jolt India as badly as other world-shaking financial ructions have in the past.

Asia’s No. 3 economy has found itself in the splash zone of previous faraway-seeming market events, from the 2008 financial meltdown to the threat, five years later, that U.S. monetary policy might return to normal after the worst fallout of that collapse appeared to be over.

India isn’t in that kind of position this time.

Even if Greece’s troubles precipitate a Europe-wide crisis—and there are the reasons to believe they won't—India’s vulnerability is small, both in absolute terms and relative to other economies in the region. European banks’ lending to India is equal to just 6% of India’s annual economic output. Singapore, Taiwan and Malaysia are far more exposed to a bank pullback, according to Nomura calculations.

India’s overall reliance on foreign funding is also low for the region, thanks to the central bank’s buildup of foreign-currency reserves since a balance-of-payments scare in 2013. Indonesia, with its large current-account deficit, is far more vulnerable to a sudden contraction of investor appetite for risk, and Jakarta stocks have already suffered as a result. Malaysia, with a big chunk of short-term external debt, would also be hit hard by a sudden pullout, notes London-based research firm Capital Economics.

To be sure, India’s auto makers, as well as its pharmaceutical and technology firms, could suffer in the short term if sales to the eurozone waver. But India’s overall exports to the eurozone represent a far smaller share of the economy than they do in Vietnam, Bangladesh or Thailand.

The S&P BSE Sensex index was up slightly Tuesday morning as investors in India and in other asian markets appeared to push off Greek concerns for now. The benchmark index in Mumbai lost over 500 points on Monday before recovering to close down 0.6%

The ECB said today it would keep open its emergency cash lifeline to debt-hit Greece 

but not increase help to banks, leaving the country facing as financial crunch as a bank run gathered pace.

The European Central Bank's Governing Council held a telephone conference the day after talks between Athens and its creditors broke down, leaving Greece headed for an EU-IMF default and possible exit from the eurozone.

As anxious citizens lined up to get cash from bank machines, the Greek government appeared under pressure to impose capital controls limiting the size of withdrawals or overseas transfers.

The ECB Governing Board board said it "decided to maintain the ceiling to the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on Friday".

"The Governing Council stands ready to reconsider its decision," it added in a statement.

The Frankfurt-based bank has been the lifeline keeping Greek banks -- and by extension the Greek state -- afloat with the ELA emergency cash through five months of tortuous negotiations that have now taken a sharp turn for the worse.

As fears grew of financial markets turmoil and contagion on Monday, it also said "the Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance".

The ECB -- which has maintained ultra-low interest rates and launched large-scale quantitative easing measures -- said it "is determined to use all the instruments available within its mandate" to maintain price stability.

Bank of Greece chief Yannis Stournaras said in the same statement that his bank "will take all measures necessary to ensure financial stability for Greek citizens in these difficult circumstances