What could be Euro's impact on the Indian currency and financial markets?

As of today the foreign exchange and currency derivatives markets are dominated by the US dollar and Japanese yen, apart from six or seven europeancurrencies. After a `complete' economic and monetary union, this would be reduced to just three currencies: dollar, yen and the euro.

This would mean that speculators will look at `exotics' and at currencies like the Indian rupee, especially when there is a relative stability in the exchange rates of the main three currencies.

This, and the increasing interest of Euro-denominated funds (like pension funds) in non-EU markets, will force countries like India to follow appropriate economic and monetary policies to invite funds and to discourage the powerful speculators from causing havoc with the domestic exchange rates. In effet, this means more discipline and more transparency in the domestic financial markets!

However, there could be a strong negative implication too! The threat of speculators can lead to enhanced controls on currency movements, especially relating to capital account convertibility, with governments justifying such moves in the interest of safeguarding domestic currency. This couldhave disastrous consequencies for trade and industry, because capital controls can be justified only as temporary relief measures; in the long run, markets should be allowed to perform their function, unhindered by overbearing regulations.

I hope governments will see more logic in developing domestic markets and making them stronger, rather than stunting their growth by excessive controls.

How will Euro affect the Indian corporate world?

With the elimination of multiple pricing and foreign exchange risks, reduction of inter-country barriers on goods movements across euroland, and greater market transparency alongwith faster and cheaper currency movements because of single currency, no-doubt the opportunities for business with Europe will be manifold.

However, EMU has come about primarily to benefit trade within the EU-block companies. The `single currency' has ben designed to provide competitive advantage to EU-companies, at the cost of companies in the non-EU countries. In this aspectnon-EU countries will really have to work harder on sharpening their strategy and competitiveness.

However, the harmonisation of technical certification across Europe (a central certification authority for euroland in this regard is expected to be set up in the near future) and single Euro-denominated product pricing across Europe will remove many anomalies from business transactions with European countries. This will be a major advantage for non-EU companies.