Finance Minister P Chidambaram and the Prime Minister's Economic Advisory Council chairman C Rangarajan today expressed caution over the likely impact of a slowdown in the US on India's economy.

"If the US, in response to a slowdown, cuts interest rate drastically, that will widen the differential between Indian and US interest rates. This will have consequences through higher capital flows and rupee appreciation. Purely as a theoretical concept, if the interest rate differential widens, it would have consequences and we will have to deal with it," Chidambaram said today at the CII Partnership Summit.

However, Chidambaram said the US was unlikely to go into recession. "At the moment, we are all speculating. Why will the US allow its economy to slow down?," he said.

Rangarajan, on the other hand, while releasing the "Review of the Economy, 2007-08" at a separate event, said that a deeper recession would have a serious impact on India's growth prospects next year.

"We do not know whether the sub-prime crisis will lead to a deeper or mild recession in the US economy. However, we have assumed that it will only lead to a mild recession. A deeper recession will have more impact on India through reduction in trade and capital inflows," he said.

Slower growth in the developed world is expected to impact emerging economies like India by reducing demand for their exports in rich country markets.

Chidambaram added that a slowdown in the US may have limited impact on India. "Our exports to the US are significant, but not as much that they will deeply affect us. We have equally large exports to the European Union, China, Japan and the rest of East Asia. I do not think a slight slowdown in the US will so drastically or immediately affect India's growth prospects. It will have some impact, of course," he said.