will U.S Financial Crises going to hurt India

[jamesbond07]

Financing India growth would not be that much of an issue
Deepening financial distress in the United States has affected even the most basic financial intermediation, with US authorities currently making great efforts to restore fully functioning markets.
These conditions would probably have a limited direct effect on India, but the implications for global demand could result in a moderation in exports. Moreover, heightened risk aversion could also impact pricing of assets.
Being largely a domestic economy with exports including software at 17% of GDP, India is relatively insulated in comparison with most other economies.
Though it is difficult to quantify the exact implications at this stage, a couple of points worth keeping are: (1) Indian IT companies have around a 30% exposure to financial services; (2) funding constraints could result in some uncertainty for the real estate sector; and (3) while direct exposure for Indian financial institutions is negligible there are a few firms which could be impacted at the margin.
However, a point to note is that given the deterioration in the global and domestic macro environment seen over the year, India Inc has been adapting and innovating with a clear focus on profitability. But the adverse macro environment is having an impact on growth and expansion plans with growth estimates now in the 7%-7.5% range.
Our FY09 and FY10 GDP estimates of 7.5% and 7.4% factor in single-digit investment growth from a CAGR of 17% seen during FY03 to FY08. This is basically due to the fact that investments have faced a double whammy with rising input costs on the one hand; and higher, more stringent borrowing constraints (both domestic and global) on the other.
Growth would have been lower were it not for the buoyant savings, productivity gains, healthier balance sheets and the possibility of monetary easing next year. In addition, a sustained fall in commodity prices bodes well for inflation, rates and the fisc.
While the impact on growth and exports can be quantified, the impact on currency and capital flows is not as clear. The reason is that despite India being a domestic-driven economy with strong macro fundamentals, in times of an increase in risk aversion, countries with twin deficits, inflation and political challenges tend to be viewed with caution.
Moreover, a lot would also depend on monetary policy responses (both of the Fed and the RBI) as asset reallocation could result in inducing capital flows to those countries where interest rates are higher.
The panic over the health of the US financial system has caused severe de-leveraging of balance sheets with firms and investors rushing to convert assets into cash to reduce risk and to preserve operating capital. The process is likely to continue and will impact economies/corporates who access international capital.
De-leveraging and the increase in risk aversion could result in higher spreads thus increasing recourse to domestic sources of funding. However, we believe that financing the India growth story would not be that much of an issue given the buoyancy in deposits, high savings and levers available with the RBI to inject liquidity.
Recent steps taken such as increasing the attractiveness of NRI deposits, and providing additional liquidity support via the LAF window to alleviate the liquidity shortage are encouraging. We believe that we could see the RBI becoming more active in the coming months.
Possible measures include (1) further relaxation of norms on the capital account, both NRI and ECB guidelines, (2) a likely cut in the SLR given the continued buoyancy in both credit and deposits and consequent demand for government securities to meet statutory requirements, and (3) a possibility of keeping rates on hold given lower commodity prices and stabilising inflationary expectations.