The BSE Sensex crashed 900 points on Tuesday in its biggest one-day fall in over five years. The selloff served as a reminder about the vagaries of the stock market and would have shaken many investors out of their comfort zone. (Read the full story here)
"What was turning out to be a pleasant outing for investors in Indian equities has been disturbed by a few villains - one, a rather well-known character by the name of Greece and the other an oddly behaving character called Crude," says Girish Pai of domestic brokerage Nirmal Bang.
Greece, whose economy is a little over 10 per cent of India's GDP, has suddenly become very important for domestic investors.
On Tuesday, senior journalist Ashok Malik tweeted, "Frankly I don't think Greek has had such impact on Indian fortunes since Alexander defeated Porus #Sensex."
Frankly I don't think Greek has had such impact on Indian fortunes since Alexander defeated Porus #SensexAshok Malik (@MalikAshok) January 6, 2015
Greece's economy might be small - G. Chokkalingam of Equinomics says it's just 0.3 per cent of global GDP - but its problems have roiled global markets since 2009.
"The fears aroused by "Grexit" have never been about the size of the economy. The worry is much more about how interconnected Greece is with the rest of the euro zone... The conversion to the euro was meant to be irreversible; that principle would be destroyed if Greece left," says the Economist. (Read)
In simple terms, if Greece exits euro zone, it could lead to a contagion; many other countries (Italy, Portugal, Spain) struggling under huge debt could follow suit resulting in a domino effect, analysts say.
The euro is already struggling and it hit a nine-year low against the US dollar on Wednesday. Other global currencies are also under pressure, including emerging market currencies such as rupee.
According to Bloomberg, only about a fifth of Greek government debts are owed to the private sector, while borrowing by Greek private companies accounts for less than 1 per cent of loans made by Europe's biggest banks. But, a sovereign default or a pullout from euro zone would trigger a crisis in global financial markets, analysts say.
Big investors could pull out money from risk assets and emerging markets such as India, who have been beneficiaries of foreign funds, would come under pressure. In 2014, foreign institutional investors pumped in over $40 billion in Indian debt and equities.
To understand how Greece may further impact India, investors need to rewind to the events of December 16, 2014, when the Sensex slumped 583 points in intraday trade and the rupee hit a 13-month low. The selloff in markets was not driven by domestic factors, but because of a collapse in Russia's rouble.
The rouble crashed tracking falling crude oil prices, but Indian markets had to bear the brunt even though the country benefits from falling cost of fuel. India imports nearly 80 per cent of its energy needs and falling oil prices not only help the government's finances, but are also beneficial for corporates and consumers.
"Oil is setting off several other dominos across the globe. You had a taste of that when we saw what happened in Russia. The biggest fear is this could probably lead to some sort of a currency crisis in which case the entire emerging markets will be treated as a single basket," said CK Narayan, MD of Growth Avenues.
Clearly, in a world where money can enter and exit markets freely, sharp movements, such as the one seen on Tuesday, are unavoidable, analysts say.
The good news is chances of "Grexit" are low according to some economists and oil prices might be bottoming, having dropped below $50 per barrel on Wednesday. Finally, the strength in India's economy and hopes of further reforms may convince foreign investors to not exit the country in a hurry, analysts say.
"Our expectations are of a 2015 year-end Nifty target of 9,500," Mr Pai said.