At a time when a possible rise in interest rates by the US Federal Reserve and volatility in the Chinese markets were weighing on markets, the Greek crisis has added to the woes.
Singapore-based Sanjay Mathur, managing director, head of economics research for Asia Pacific (ex-Japan), Royal Bank of Scotland, tells Puneet Wadhwa the developments could trigger a risk-off trade in the global equity markets, but the duration and depth of the correction is not determinable right now.
As regards India, market valuations already reflect most positives, he adds. Edited excerpts:
What is your interpretation of developments in Greece?
The reality we are faced with is that the sort of reforms that are being required from Greece, and, most important, the degree of fiscal compression needed is having a significant impact on growth.
Therefore, Greece's standpoint that the economy has gone into a downward and vicious spiral of tight policy and slowing growth, i.e. if growth slows, the fiscal situation gets even worse and the stress level increases.
To that extent, there is significant opposition in Greece that the pain inflicted is not only severe, but is unnecessary in the circumstances.
Could 'Grexit' become a reality?
Whether Grexit becomes a reality or not is very difficult to answer at this point in time.
It would be a lot clearer over the next couple of weeks, but as of now, it is really a question of brinkmanship between the European Union (EU) and Greece.
What are the implications for major global economies and markets?
The implications would largely manifest in financial markets - greater volatility, euro weakness and some sell-off in the emerging markets as well.
That said, we also need to keep in mind that the impact may not be very durable, as the European Central Bank (ECB) recognises that Grexit is a risk and would be willing to step up its quantitative easing programme.
We have observed that the global central banks have become much more flexible in their monetary policy post the Lehman Brothers crisis in coping with market breakdowns.
Another point needs to be kept in mind. Private sector participation in Greek financial markets has come down substantially and the linkages between Greece and other financial markets are not as pronounced anymore. This limited engagement could possibly make the process smoother than we think.
Which economies, in your opinion, are better placed to withstand adverse global economic conditions?
Financial and real economy imbalances have receded quite a bit across Asia. The fundamental problem now is growth or the lack of it.
So, the way to look at Asia now is who is more export-dependant and who is not. In that situation, the two large economies in Asia - India and China - are in one camp, while the others are far more export-dependant.
Indonesia could have fallen in the India and China basket, but the reality is that Indonesia is one place where imbalances are yet to fully resolve themselves.
Could all these developments trigger a risk-off in equity as an asset class across the globe?
They can but the duration and depth is not determinable right now.
How insulated is India, given its macros and the road ahead for reforms?
Fundamentally, if one looks at the current account and external funding requirement, etc., a lot has changed from where we were 12-18 months ago.
India is much more stable. Forex reserves are also at an all-time high, the current account deficit is modest and despite the recent rate cuts, India's interest rate differential with those in developed countries is quite high.
So there is a fair degree of protection here.
As regards reforms, the developments will not alter the course of the reform process. However, what it does is that it endangers the 'Make in India' story. It is difficult for this programme to take off amidst weak global trade.
How does India look as an investment destination amid all this within the Asian or emerging markets?
India still looks a reasonable investment destination, as there is still some degree of growth momentum here.
It is also less risky, given the limited reliance on exports. However, the problem is that it is already fairly reflected in the valuation.
So, to say that India's financial markets are weather proof is a misplaced thought, especially considering the high levels of foreign ownership. There will be some weakness.
