The sell-off in the equity markets, especially by foreign institutional investors, could have a ripple effect across asset classes and impact consumer spending.

"Equity markets are a critical driver of liquidity and money supply. At reversal of FII flows could dry up domestic liquidity,'' said Abheek Barua, chief economist, HDFC Bank [Get Quote].

The spillover effect

• Liquidity dry-up will hurt asset classes across board
• Property prices may not fall, but transactions will dry up
• Banks will have to liquidate their position to meet liquidity
• As a result, bond yields will rise as bond prices fall
• Commodities, which fell 3-5% on Tuesday, could slip further
• In times of uncertainty, gold will emerge as a preferred asset class
• Could impact sentiment, and consumer spending

Banks will have to liquidate their position to meet liquidity requirements. Bond prices, which have been going up because of excess liquidity, will start falling due to shortage of liquidity.

''Banks will stop purchasing bonds, and start selling bonds. Bond yields will rise and bond prices will fall,'' added Barua. On Tuesday, however,  the yield on the benchmark ten-year paper fell to 7.46 per cent as against 7.54 per cent on Monday.

Then, of course, there's the substitution effect. ''If there's a loss in market cap and wealth, investors could pull out money from one asset class and put them in some other asset class,'' said Samiran Chakravorty, chief economist, ICICI Bank [Get Quote].

If liquidity dries up, commodity and real estate markets too would feel the impact. ''If there's a problem with liquidity, it affects the cost of carry. Commodity prices will decline. Similarly, it impacts your ability to hold onto a land because there's not enough money to lock up,'' added an economist.

No wonder, commodity prices have fallen 3-4 per cent across the board. ''When there is a huge meltdown in equities, investors try to book profits in other asset classes to offset their losses,'' said Jayant Manglik, head-commodities, Religare Enterprises.

Aluminium prices have tumbled 17 per cent since January 1 2007 on the London Metal Exchange on fears of a slowdown in the US.

Real estate prices, which had shot up because of easy availability of cheaper credit, could see a correction. ''Prices may not decline much but transactions could dry up. When markets turn illiquid, you may not see too many quotes for prices. There could be stray deals at lower prices,'' said Barua.

''If there is a persistent correction in the stock market, it could negatively impact property market,'' Ambar Maheshwari, director, DTZ.

''The extent of fall in real estate prices depends on the fall in stock markets and a persistent slowdown in capital markets for 4 to 6 months,'' Anuj Puri, chairman, Jones Lang Lasalle, said.

Investors could find solace in gold, which has traditionally provided a hedge against inflation or global uncertainty. The yellow metal, after having a dream run for a year or so, is witnessing a significant correction as the US dollar is gaining. Gold was bought as a hedge against the dollar.

As investors are turning to the US treasury bonds, the dollar has strengthened.

''I feel there's some more steam left in gold. In times of extreme panic and uncertainty, gold emerges as a preferred asset class,'' added an expert. What should be of more concern to marketers is that crash in equity markets could impact sentiment, and consumer spending of discretionary nature.

''There will be an adverse wealth effect on consumer durables. When your asset holdings go up, there's a notional increase in wealth; you feel wealthy. Everything is driven by sentiment,'' said an economist. A recent IMF study revealed that a 10 per cent decline in equity markets in India leads to a per cent fall in consumption.

''If there's a persistent slowdown, discretionary spending will be impacted in sectors like real estate, consumer durables,'' said Samiran Chakravorty, chief economist, ICICI Bank.

Experts feel the Reserve Bank of India [Get Quote] could step in, if required, to infuse liquidity. ''RBI had issued Rs 177,000 crore (Rs 1,770 billion) worth of MSS bonds to such out liquidity from the markets. It could use these bonds to inject liquidity. It could decide not to roll over these bonds and buy these treasury bills,'' said Chakravorty.