Indian stock markets plunged today, erasing gains made in last three weeks, after Greece imposed capital controls and closed banks until July 6 following collapse of rescue talks with European lenders.
The 30-share BSE Sensex fell 2.17 percent, while the 50-share Nifty lost 2.2 percent, heading towards their biggest decline since June 2.
Greece looks set to default on its huge debt, unless it can reach an agreement with international creditors and other European Union countries such as Germany and France for a bailout. Greece imposed bank controls after the European Central Bank froze its lifeline to the country's banks.
Uncertainty about the future led to people queuing up to withdraw their savings from banks. That might happen on a much bigger scale if a rescue deal does not materialize.
Indian stocks are not likely to fall as much as they did in 2008, when Lehman Brothers collapsed and a full-blown financial crisis engulfed much of the developed world.
"Our markets will witness lower volatility than peers as we are less impacted from unfolding events in Greece and EU. Certain stocks in IT, pharma and auto ancillaries having significant exposure to the euro will under-perform the market. Since Greece issue is well known for some time, it is unlikely to cause as much correction as the 2008 global crisis," said Nilesh Shah, Managing Director, Kotak Mutual Fund.
The market might fall further if Greece defaults. Customers will rush to withdraw all their savings, resulting in a catastrophic run on banks. The ensuing financial crisis might lead to Greece's exit from the eurozone, and set off a contagion.