Weakening euro may impact IT exports: RBI .

The rupee-euro and rupee-pound exchange rates matter most for software exports than rupee-dollar and to that extent, a weakening euro would have an impact on service exports, the Reserve Bank Governor, Dr D. Subbarao, said here. Speaking to newspersons after an RBI board meeting here, Dr Subbarao said that the RBI has been studying developments in Greece over the last one month.

Best case scenario: Europe accounts for about 27 per cent of our trade. So if Europe has some setback to its recovery process, there would be some impact on our trade, he said. “We do not see any significant impact under the best case scenario on financial flows, in the overall sense. If there is turbulence in the international market, there would be some knock-on impact here but that would be transient and marginal. But if there is deviation from the best case scenario, the complexion changes and there would be some significant impact. We feel that this is unlikely at this point of time,” he said. He said that if the (bailout) package is seen as not credible and if confidence saps, there could be a jolt to the international economy and there could be flight to safety. Then, we would witness outflow of capital.

Rebalancing portfolio: Another extreme situation is if the package is seen as too costly. Such a scenario, could lead to some rebalancing of portfolios and trigger some outflow of capital. “But either way, as I said earlier, these are extreme scenarios that we don't see playing out any time soon,” the Governor said. Dr Subir Gokarn, Deputy Governor, said that there was also the risk of very large capital inflows if the overall nervousness about the European financial markets were to result in flow of resources into emerging markets and if India got some of that. “We are keeping watch on both these probabilities which are on top of our minds. We're waiting to see which way, if any, the pendulum is swinging. But we are pretty confident that we have the capacity to deal with the situation,” Dr Gokarn said.

Source : Business Line