No Major Impact Of Euro, Says Study

As the world moves towards the new millennium, 11 countries of the European Union (EU) have begun to implement what could be counted as the most significant developments of the millennium.

The individual currencies of all these countries will be replaced by a single one called euro. Following this, all the inter-bank payments, exchange rate quotes, stock market quotes and new government bond issues will be denominated in this currency.

The advent of euro could result in the bargaining power of the EU improving significantly from the Indian context, says a report by the Bombay Stock Exchange (BSE) brokerage Khandwala Securities.

The report does not foresee any major impact on the Indian capital markets as far as the euro is concerned. At best, the move on the part of the Reserve Bank of India (RBI) to shift a part of the reserves from US dollar to euro may see a depreciation in the dollar vis-a-vis the rupee.

This may mean a slowdown in selling pressure from foreign institutional investors arising out of concerns over the exchange rate.

But the EU could put pressure on local manufacturers to curb margins as they would be having a huge market to offer for exporters in manufactured goods and textiles. This could result in the already strained producers losing out further, the report adds.

EU is India's largest trading partner and considering the country's closeness to its member-nations, there could be a substantial shift in the domestic foreign currency reserves from US dollars to the euro beyond 2000.

The key revenue generating sectors (exports) from Europe are manufactured goods, readymade garments and textile yarn, agriculture and allied products, and gems and jewellery. In the financial year 1998, exports of agriculture and allied products yielded $6.41 billion for India. Gems and jewellery fetched $5.12 billion, textile yarn $4.27 billion and readymade garments $3.7 billion.

In the case of imports, capital goods is the key item from Europe.

This exceeds our imports from the US as well, showing EU's strength in the sector. The imports of these products are mostly dependent on capital investments by the local industry. Given the size of the Indian markets and the labour-cost advantage that the country has, such investments should be large when a recovery occurs. The report concludes that in the medium-term, although the euro will take off some of the importance of the US dollar as the most preferred settlement currency, it would not be in a position to replace the same entirely.