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Greece may trigger forex volatility
May, 11th 2010

The Reserve Bank of India said the Greek crisis may lead to short-term volatility in the foreign exchange market as it expects capital outflows from emerging economies like India.

RBI deputy governor Subir Gokarn on Monday said the dollar is likely to emerge stronger against all major currencies, given the huge demand for the greenback now. He expects liquidity to be adequate in the inter-bank system.

There may be some nervousness among investors worldwide which may provoke capital outflows from emerging markets in the short-run, so there is a risk of short-term vulnerability of capital outflows, Mr Gokarn said at a banking seminar, organised by the Indian Chamber of Commerce.

He said the market is somewhat nervous as no one really has a clue which country would get mired in a debt crisis after Greece. It is well known that there are similar debt-related concerns about Portugal and Spain.

He, however, expects stable capital inflows to India since nobody doubts Indias growth potential. The longer-term impact of the Greece debt crisis will not be as severe as the global financial turmoil. We are getting more and more comfort from the global economy, notwithstanding Greece, he added.

Mr Gokarn added that the central bank did not expect any pressure on liquidity in the April-September period despite high government borrowings. We are watching the developments very closely and manage liquidity in a non-disruptive manner, Mr Gokarn said.

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