MIRAGE!

Indian stock markets, companies and the government on Friday held their breath as concerns grew of reduced global capital inflows as a fallout of the $59-billion debt rescheduling sought by Dubai's government-run investment company, Dubai World.

Across the globe, there was a flight to safe havens as investors, worried about the prospect of a state default on its debt, accumulated dollars. In the process, commodities fell the most since July in one day and the MSCI emerging market index slipped by a sharp 2.6% on the London market, reversing some of the spectacular 65% rise it recorded this year, pushing record capital flows into countries like India.

Vipul Dalal, director of business development at UK's Elara Capital, said though the crisis is not as severe as initially thought, it impacted sentiment on financial markets. "This will have a larger impact on the credit markets as there is a possibility of a sovereign downgrade causing a decrease in risk appetite and greater risk aversion."

Closer home, Prime Minister's Economic Advisory Council chairman C Rangarajan said the immediate impact of the crisis would be on remittances from the Gulf. "If Dubai suffers, then it will have an impact on migrant Indians who have gone there and their income may be affected," he said.

According to CLSA, Indians form 40% of the UAE population, accounting for up to 12% of the $53 billion flows India receives annually.

About other sectors, Rangarajan acknowledged that there would be an impact, "but it is too early to say what that impact will be on India".

While RBI has asked banks to report their exposure to Dubai World, three of India's top entities--SBI (SBIN.NS : 1940.8 -9.5), ICICI Bank (ICICIBANK.NS : 810.1 -2.3) and Bank of Baroda--reported that the size of their total UAE loan book was less than Rs 7,000 crore.

In the corporate world, sectors in the line of fire are real estate, construction companies and the private equity business. The other sector that is likely to be impacted is shipping. DP World, Dubai's state-run maritime company, operates five terminals in India, accounting for 40% of the total volume of container traffic.

Private equity firms, including sovereign wealth funds from the Gulf Cooperation Council, are now likely to revisit their investment strategy. These funds together have a total investment of $2.77 billion in listed and unlisted firms in India, of which almost 90% is from the UAE. Many of these funds could liquidate their investments here to meet demand for cash back in the city-state.

In sync with other emerging markets, the benchmark BSE Sensex (^BSESN : 16025.71 -16.47) fell mid-session by over 600 points, or 3.5%, on Friday. But it pared the losses to end much better with a 1.32% slide. The broader 50-share Nifty (^NSEI : 4784.3 -8.35) of the NSE ended down 1.27%. Other than Rangarajan, markets were also reassured by positive comments from the RBI governor D Subbarao and finance secretary Ashok Chawla.

Subbarao said he has asked his officials to study the impact and "if necessary, make recommendations". Rangarajan was sure the impact would be contained. "I don't expect really a slip back as far as the economic recovery is concerned. Most countries in the West have shown positive growth in third-quarter 2009 and this trend will continue. But as we all know, that recovery is going to be slow and modest."