Expert Views - DMK withdraws from UPA coalition

MUMBAI (Reuters) - Key regional ally Dravida Munnetra Kazhagam (DMK) pulled out of India's ruling UPA coalition on Tuesday in protest against the government's position on a U.S.-backed United Nations resolution on war crimes carried out during Sri Lanka's civil war.

COMMENTARY

SANJAY MATHUR, HEAD OF ECONOMICS RESEARCH, ASIA PACIFIC EX-JAPAN, RBS, SINGAPORE

"There was a lot of critical legislation required to deliver the projects proposed in the budget, like the industrial corridors. This will slow it down. It has injected a fresh dose of uncertainty.

But I think the government cannot overstep on the fiscal correction. The budget dynamics is hard to alter because the threat of a rating downgrade is severe. It is unsettling for foreign investors.

Because of the current account gap, we are reliant on flows. If the flows get truncated, it would be difficult. But I think it would be a knee-jerk reaction."

MOSES HARDING, HEAD OF ASSET-LIABILITY MANAGEMENT, INDUSIND BANK, MUMBAI

"Emergence of political risk at this crucial stage of policy reforms and fiscal consolidation is definitely a worry. There will be risk from global rating agencies and shift into risk-off mode by global investors.

"Impact will be negative, but I don't see weakness beyond 7.95 percent on 10-year bonds and 54.60 to the dollar on rupee."

A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI

"If the government comes under threat and early elections are called, then fiscal consolidation will come under risk as diesel prices will not be raised.

One of the achievements of this budget is the way the government has held down its fiscal deficit: it gave confidence to investors that next year's fiscal deficit will also be contained.

But overall, I think the government will be able to arrive at a consensus with DMK."

V.K VIJAYAKUMAR, INVESTMENT STRATEGIST, GEOJIT BNP PARIBAS, KERALA

"If the political situation turns murky, the finance minister will find it difficult to take reforms forward at a time when the economy need a morale booster. Political instability will confuse matters

The government will not fall but the political damage that it will do to the economy will not be marginal. It will have a serious impact."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"With the federal elections next year, political stability is key for all economic reforms. This is unlikely to stall the reform process but it will surely delay the economic reforms to some extent.

The DMK have asked the government to take a decision on Sri Lanka by Friday, post which they will reconsider their withdrawal, so this is a conditional threat.

Markets will remain apprehensive till the government finds out a concrete solution. If DMK withdraws then the government will have to depend on Mayawati, Devegowda and Mulayam Singh, which does not augur too well for the government."

ASHTOSH RAINA, HEAD OF FOREX TRADING, HDFC BANK, MUMBAI

"Political instability is the biggest factor for the markets as of now. The rupee looks weak in the short term now. We could see 55 levels depending on the developing political scenario and the pace at which it evolves"

MAHESH PATIL, CO-CIO, BIRLA SUN LIFE MUTUAL FUND

"The government's resolve for doing reforms would be tested again after this political development."

G. CHOKKALINGAM, CIO, CENTRUM WEALTH MANAGEMENT, MUMBAI

"DMK threat is quite real given the political situation in Tamil Nadu. Now Congress needs support form both SP and BSP to remain in power. Markets are getting scared on possibilities of early elections." (Reporting by Mumbai markets and treasury teams)