By Nikhilesh Bhattacharyya, Associate Economist, Moody’s Economy.com
Nov 27, 2008: In an attempt to destabilise markets and scare off tourists, terrorists have attacked major landmarks in India’s financial capital, targeting spots that are popular with foreigners. The Mumbai stock market—which is in the vicinity of the areas targeted by terrorists—is likely to be open on Thursday despite the attacks, while the rupee may weaken further when trading resumes; already trading near its weakest ever level against the greenback.
But although the terrorist attacks are expected to affect market sentiment, local investors in Mumbai are well acquainted with terrorism and unlikely to engage in panic selling. The commercial centre has been the target of major terrorist attacks in 1993, 1997, 1998, 2002, 2003 and 2006; while other major Indian cities—including popular tourism centre Jaipur and technology hub Bangalore—have witnessed bombings this year. However, the timing of the current blasts may be more unfortunate than in the past, with Indian banks facing major liquidity problems and the Reserve Bank of India struggling to defend the ailing rupee and stabilise credit markets. This means that capital outflows will have a greater impact than they did in the past, though history suggests that any reaction to terrorist attacks in Mumbai will only be temporary.
Following the July 2006 Mumbai train bombings which killed over 150 people, the benchmark SENSEX continued to rise in the days following while the rupee weakened 1% before stabilising soon after and eliminating the losses. But with the economic climate very different to 2006 and the current attacks aimed explicitly at foreigners, there is a chance that markets may unfortunately react sharply when they open next.
Nikhilesh Bhattacharyya is an associate economist in the Moody’s Economy.com Sydney office. He covers Indonesia, Malaysia and the Philippines for the World Workstation and is a regular contributor to the Dismal Scientist web site. Nikhilesh received his bachelor of economics degree (honours) from Macquarie University, where he also worked as a research assistant.
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