The global crisis induced by downgrading of U.S's sovereign rating and Europe debt crisis has once again flared up the discussions of Indian economy's extent and impact of coupling with the global economy. The BSE Sensex' slide on account of adverse developments in the global economy has been a reality check for Indian stock markets. The central bank (RBI) has adopted a cautionary tone. It has suggested that India is not insulated from what is happening around.
Let us take a look at how the Indian economy gets affected by the US crisis. The U.S debt downgrade and the resultant slowdown in global economies have spelt trouble for export oriented domestic companies. More so for the IT sector where 80% of the revenues are dollar denominated. The domestic demand is not promising either, thanks to the continuous rate hikes taken by central bank. The same has rendered domestic borrowings unviable due to which the corporates resorted to cheaper foreign funds. The recent turn of events will take away that advantage as well.
So what will be the fate of Indian economy from here? The fact that Indian economy grew by 6.8% even in the last financial meltdown is testimony to high resilience of Indian economy. Further, those who can read between the lines will be able to see a silver lining in the clouds. The slowdown in the global growth will bring commodity prices to more affordable levels. This will be a breather for central bank that has gone for frequent rate hikes in the past on concerns of high inflation. A break from the tightening cycle will also support growth. However, we need to be especially watchful of global developments and the macroeconomic stability. While some hit is obvious, the recent events may turn out to be an opportunity in the making. What with the Indian economy becoming more attractive with a turn in the macro cycle, affordable prices, attractive valuations and expected policy reforms?
By Equitymaster – India's leading 'independent' equity research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian stock markets.