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Federal Reserve Actions to Lower Interest Rates & Stimulate the Economy

American Crisis and India

The basic reason for the decline is crisis in the US economy. Indian and American economies are interlinked in two ways - through trade in goods and flow of capital.

The demand for Indian exports declines as the American economy sinks. But India certainly gains from cheaper imports in the same measure. Garment exporter suffers because his orders are cancelled but software engineer makes merry because he gets Windows software cheap. The combined effect of exports and imports on the economy is nearly zero. However, share markets respond to the woes of exporters who are listed on the bourses and not to the gains of consumers. Thus, there is a negative impact on Indian share markets although there is little impact on the economy.

The interlinkage through capital flows is tricky. There is an outflow of capital from India in the short run as the American economy sinks, but there is greater inflow towards India in the long term.

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* Contributed by: -
Sunil Kumar Panda,
PGDBM, 1st Semester,
Fortune Institute of International Business, New Delhi.
Article posted on Fenruary 14, 2009.