• SEPTEMBER 12, 2001

Stock markets hit by 'terror'

Yesterday's terror attacks in the US have for now put to rest any anticipation of a near term rally. This is not because of the impact on exports or growth but due to uncertainty surrounding the incident.

The uncertainty pertains to whether a Gulf War like situation may arise. The US has been attacked and there is a lot of speculation regarding retribution. Already, oil prices have surged and stock markets have reacted very sharply.

However, India seems to be much better prepared this time.

Our external debt position is very comfortable. Total external debt stood at US$ 100 bn at the end of FY01, which is near about 21% of GDP (as recently as 1992, this ratio stood at 40% or thereabouts). Of this short term debt was just US 3.4 bn i.e. 3.5% of GDP. Given our foreign exchange reserves of nearly US$ 45 bn (as in August 2001), there is a little chance of a repeat of a Gulf War like situation.

Moreover, India's exports constitute roughly 10% of national GDP. Given this modest component of our national income, and the fact that our exports are well diversified, the impact will be marginal.

  • More on the Indian Economy

    What is critical for India is how crude prices react to these developments. This is because even though we may be able to overcome this situation financially, the impact due to high crude prices could be detrimental to any hopes of a near term recovery. High crude prices would contribute to inflation, which would have a direct impact on demand. Higher inflation in turn would limit the ability of the RBI to cut interest rates to boost economic growth.

    The US markets remained closed yesterday and are likely to remain so today. Other international markets have recorded a sharp fall. Gold on the other had has recorded gains. Historically, gold prices react positively to adverse developments.

  • See Gold's journey over the years

    The situation is one of uncertainty. Investors need to be cautious.

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