US economy has registered a growth of 1.9% in first quarter of 2007 against the projected rate of 2.7%. A consumption-led slowdown in US economy will have an impact on its trading partners.
Indian economy has registered a robust growth rate of 9.3% in 2006-07 and the projections for 2007-08 are quite optimistic. India's exports may record a decline if the US slows down. In 2006-07, approximately 15% of India's exports were directed to US. The negative impact of the slowdown in exports can be partly offset by export of services.
On the financial side, Indian banks and financial institutions have a very low level of exposure to US mortgage backed securities. So, it is highly unlikely that India will bear brunt of US sub-prime mortgage crisis. But the sub-prime crisis has sent the equity markets into a tailspin. Indian markets have crashed by 10.13% over the past one month (July-August) before recovering back to normal grounds. The hedge funds are winding-up their positions in the domestic market to make up their losses in US sub-prime mortgage market.
On the credit side, Indian corporates have raised about $15 billion from external sources in the first five month (Jan-May) of 2007. At the extreme, Indian corporates could face higher cost of borrowings due to increasing credit market spread. Companies would have to tap into the domestic credit market as an alternative, thereby exerting upward pressure on the interest rates. This could carve down the growth rate.
But the question arises- Is there any sub-prime market in India? Lending to real estate and construction sector has been increasing at an annualized rate of 40-50% in the last 5 years. Is Indian housing sector a replica of US real estate sector? Reserve Bank of India, in the recent times, has taken a tough stance on lending to real estate sector. It has increased the exposure limit from 100% to 150% on bank's lending to housing or real estate sector. And, given the huge demand of real estate especially from IT and retail sector, it does not seem that the Indian markets are imitating the US housing market.
It is premature to comment on the extent of these repercussions given the short life of the crisis. However, the spillover of the US financial crisis to the Indian economy may not be significant enough to overwhelm the positive economic momentum already in place.