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Lehman fall to hit portfolio flows: PM's panel
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September 16, 2008 20:08 IST

Global financial crisis following the collapse of Americna investment bankers Lehman Brothers will adversely impact the portfolio investment in India, according to Prime Minister's Economic Advisory Council (PMEAC) chairman Suresh Tendulkar.

"Economic environment have become uncertain. Portfolio investment (in India) will be adversely affected," he told PTI while talking about the fallout of the decision of the Lehman Brothers, one of the largest investment bankers in the US, to file for bankruptcy protection.

However, he added, much would depend on the way the United States Federal Reserve reacts to the situation and takes initiatives "to prevent the spread of contagion effect and stem the rot."

When asked what steps the Reserve Bank of India [Get Quote] and the government could take to neutralise the fallout of the crisis on India, he said, "I don't think they can do much. They are grappling with our own problem of rising inflation."

Lehman Brothers, a 158-year-old financial institution, has filed for bankruptcy protection, after losing around $60 billion (About Rs 2,76,000 crore) in sinking real-estate market.

Another investment bank Merrill Lynch is being bought over by Bank of America for $50 billion, while world's largest insurer American International Group (AIG) is also facing financial crisis.

Meanwhile, Lehman Brothers Asia Ltd, Lehman Brothers Securities Asia Ltd and Lehman Brothers Futures Asia Ltd have suspended their operations with immediate effect, including ceasing to trade on the Hong Kong Securities Exchange and Hong Kong Futures Exchange, until further notice.

With regard to the falling rupee value, Tendulkar said, "Rupee is depreciating because of the rising current account deficit and has nothing to do with the current situation."

Meanwhile, Standard and Poor's chief economist for Asia Pacific Subir Gokarn too felt that immediate impact of the global financial crisis would be on foreign investment, "but at some point of time, the process will correct itself as the India's macro-economic story remains intact."

The exit of foreign funds in the aftermath of the crisis, he added, would have negative implications for the external sector, thus putting further pressure on rupee.

"The major impact," he said, "will be on funding of infrastructure sector projects, as it will become difficult for domestic companies to garner overseas funds in adequate quantities."

Pointing out that the US economy is likely to register negative growth rate in the last quarter of the 2008 and first quarter of the next year, Gokarn said the effect on India would be marginal as the country did not much dependence on exports to America.

On the positive side, he added the country's economy would benefit from sliding crude oil and commodity prices in the international market.

Having touched a high of about $147 dollar a barrel in June, the crude oil prices slipped to about $91 per barrel, thereby putting pressure on the government to reduce the prices of petroleum products in the domestic market.

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