DUBAI DOLDRUMS CAUGHT IN DESERTED STORM

DREAMS TURN TO DUST: BUT IMPACT ON REST OF WORLD TO BE LIMITED  The sands continue to shift below Dubai's feet, sending ripples across world markets, but investors are keeping their faith in sturdier economies like India TEAM ET   WORLD markets were on their way to regaining their recentlyacquired composure as fears that the knock-on effect of the financial crisis in Dubai would lead to a double-dip global recession abated.      In India, policymakers did not appear too concerned about the impact of Dubai's troubles on the economy and the benchmark Sensex of the Bombay Stock Exchange pared early losses to close 1.2% lower.      Emerging markets, which have been outperforming over the past few months, bore the brunt of the sell-off, but major European stock indices rose on Friday. The Morgan Stanley Emerging Markets Index fell by 2.7% and the rupee, the Russian ruble and the South Korean won slid while the S&P 500 in the US recovered from opening 2.1% lower to trade 1.72% down at 12 am IST.      The sell-off in stocks, commodities and currencies was triggered after Dubai World, a government investment company with $59 billion in liabilities, sought on Wednesday to delay repayment of much of its debt even as Russia set final terms for settling the last of the Soviet Union's trade debt obligations after its 1998 default.      The sell-off may be a much-needed correction after asset prices rallied substantially this year as central banks and governments opened the money supply tap to pull the world out of the worst recession since the 1930s.      "We're bound to see a rise in risk aversion," said Arnab Das of RoubiniGlobal Economics, whose founder Nouriel Roubini predicts a double-dip recession where the economy, after recovering from the depths, contracts again as economic stimulus effects fade away.      "The Dubai situation signifies that although the major central banks around the world have stabilised the financial system, they can't make all the excesses simply disappear. We still have to work out those balance-sheet stresses. The recovery is proceeding, but significant challenges still lie ahead."      Mark Mobius, executive chairman of Templeton Asset Management, told Bloomberg News that the Dubai crisis may be the trigger to allow for the market to take a rest and pull back. "If Dubai has to default, that could start a wave of defaults in other areas," he added.      European banks with exposure to the Middle East were badly hit, with HSBC Holdings falling 7.6% and Standard Chartered Bank crashing 7.5% on fears they may be holding a substantial portion of the debt owed by Dubai.      British banks have the most loans outstanding to the United Arab Emirates in Europe, constituting $49.5 billion of a total of $87.3 billion extended by the continent's lenders to the Gulf country as of June 2009, Royal Bank of Scotland Group said in a research report on Friday, citing Bank for International Settlements.      The S&P GSCI index of 24 commodities fell as much as 4.2%, spot gold lost as much as 4.2% from its record highs of Thursday. RBI cautions against knee-jerk reactions      BUT policymakers and Indian companies, which have operations in the Emirate, believe the impact may not be much even as British football stars David Beckham, Michael Owen and Hollywood couple Brad Pitt-Angelina Jolie stare at losses from investing in Dubai's Palm Jumeirah, the best-marketed property in the world in recent years.      The potential loss numbers pale in comparison to the $2.8 trillion in writedowns the International Monetary Fund estimates US and European lenders will have made between 2007 and 2010 as a result of the global credit crisis.      Reserve Bank of India governor D Subbarao cautioned against knee-jerk reactions while finance secretary Ashok Chawla was sanguine about the effect of the Dubai crisis on remittances from expat workers. "On Dubai alone, I want to say, that we should not react to instant news like this," Mr Subbarao remarked. "One lesson of the crisis is that we must study the developments and I think we must measure the extent of the problem there and how it might impact India."      Mr Chawla said remittances from expats didn't suffer during the period when the global economic crisis was on and it is "somewhat unlikely" that it will now.      India has one of the largest populations working in the Middle East, especially Dubai. India's exports to the UAE rose 53% last fiscal to $23.92 billion, but much of it was transit trade. Construction companies L&T, Punj Lloyd, engineering company Voltas, Bank of Baroda, ICICI Bank and a host of Indian companies with businesses in the Emirates recovered from the lows of the day after dispelling fears that their business is not intricately linked to Dubai World.      "There is no material non-India link exposure to Dubai corporates," said ICICI Bank. "We do not have any exposure to Dubai," said Punj Lloyd. But Indian companies where the Dubai government, or its associates have invested may face some uncertainties, said analysts.      Istithmar, the investment of the government of Dubai has a stake in low-cost carrier SpiceJet and DP World, which may get ring-fenced from the crisis, handles nearly 40% of the container traffic in India through various port, including the Jawaharlal Nehru Port Trust and in Chennai.      "Not aware of change in Dubai's Istithmar investment strategy," said SpiceJet.      Some believe that the crisis may be blown out of proportion since the numbers are insignificant compared with the recent global credit crisis.      "Simply the market is over-reacting to a corporate entity that is attempting to restructure its liabilities," said Adrian Mowat, MD & chief Asian and Emerging Market Equity Strategist at JPMorgan based in Hong Kong. "The combination of limited information on the debt moratorium and thin trading volumes due to the Thanksgiving holiday amplified the correction. This is not the start of a wave of defaults."      Also, the wealthy neighbourhood emirate Abu Dhabi may step in to save Dubai as it had done in the past.      "At the end of the day, people like us were aware that they were overspending, we were aware that the debts were huge, but we always felt that at the end of the day, Abu Dhabi will come to the rescue and things would be OK, even though the debt levels are so high," said Mr Mobius. ON A PRAYER: People loaded a vehicle as they take a slow journey home after attending prayers during the Eid al-Adha holiday in Dubai on Friday