As investors fret over financial stability in the euro zone, they may regard India as a safe haven for global capital, given the prospects of higher economic growth here. To avail of this opportunity, the government should plan to raise the FII limit in corporate bonds and gilts. Currently, the FII investment limit in G-secs and corporate bonds are capped at $5 billion and $15 billion, respectively, with the likely prospect of being raised to $10 billion and $20 billion. FIIs in G-secs are already at $5.2 billion and foreign buying of Indian government bonds until mid-April, 2010, is five times more than that for all of 2009. In addition, external commercial borrowings are becoming increasingly popular in India, with foreign investors viewing them as an ideal medium to park funds. These funds could be well utilised to suffice India?s long-term funding needs. The economic growth and budget balances have made investors more confident about putting money even into local bond markets, where traditionally thin liquidity has spelled difficulty in exiting positions quickly.

However, Indian industry may not find similar opportunity. Indian IT firms, for example, had increased their focus on the Europe region to hedge themselves from the over-dependence on the US market. The depreciating euro and pound sterling are expected to reduce the Indian IT sector?s revenue by 1.3-2.4% for the quarter ending June 2010. On a macro level, nearly one-fifth of India?s export earnings are attributed to the euro zone, making it a significant trading partner. Although Greece is not a major recipient of Indian exports, contagion from Greece will result in the lowering of demand in other countries for Indian goods. If contagion spreads, it will increase counter-party risk and make banks wary of lending. This will result in liquidity drying up and growth shrinking further in the euro zone, in turn affecting Indian companies with exposure to European markets.

Thus, it is a difficult task to predict the effect of the European debt crisis on India. But given India?s performance through the global financial crisis, this too shall pass.

The author is at Pune University