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US-India spat: Watch it, don’t fret it

A diplomatic spat between the U.S. and India, the world's two most populous democracies, is certainty something to watch but not fret about for now, analysts say.

The arrest and strip-search of an Indian diplomat in New York last month has soured U.S.- Indian relations, prompting the postponement of two India trips by senior U.S. officials and another by a U.S. business delegation.

(Read more: Indian envoy to leave US after deal to calm diplomatic row)

"U.S. relations are one of the closest economic ties India has, so current developments are worth watching," said Rahul Bajoria, a regional economist at Barclays. "In the IT sector and the goods sector, there is significant trade surplus that India generates from U.S. firms, which needs to be kept in mind when considering any fallout from this incident."

On Thursday, Indian envoy Devyani Khobragade was asked to leave the U.S. as part of a deal in which she was granted diplomatic immunity from charges of visa fraud and lying about how much she paid her housekeeper.

A group supporting domestic workers' rights demonstrate across the street from the Indian Consulate General December 20, 2013 in New York.
Stan Honda | AFP | Getty Images
A group supporting domestic workers' rights demonstrate across the street from the Indian Consulate General December 20, 2013 in New York.

The incident has left a bitter taste. Angered by the treatment of Khobragade, India has curtailed the privileges of U.S. diplomats in India and this week ordered the U.S. embassy to close a club used by expatriate Americans in New Delhi.

(Read more: India tells US to close embassy club)

There has also been outrage at the treatment of Khobragade, with the Indian media describing the incident as the worst crisis since Asia's third largest economy carried out a nuclear test in 1998.

"This is an election year in India, with the Hindu nationalist BJP [Bharatiya Janata Party] party seeking to overturn the Congress Party. So there might be a political basis for some of the rhetoric in India surrounding this issue," said Clem Miller, investment strategist with Wilmington Trust Investment Advisors.

(Read more: India's hottest startup is a political party)

The U.S. needs a friendly India as it pulls U.S. troops out of Afghanistan and seeks to balance China's power in Asia, analysts say. In 2010, U.S. President Barack Obama described U.S.-India ties as a "defining partnership" for the 21st century.

Millions of Indians live in the U.S. meanwhile and economic ties between the two countries are strong.

Bilateral trade between India and the U.S. is estimated to be worth roughly $100 billion a year.

According to the Indian government, exports to the U.S. between January and October 2013 were worth almost $36 billion, a rise of 4.11 percent over the same period a year earlier.

Miller said he did not expect the diplomatic row to have a pronounced impact on U.S.-Indian trade relations.

"At the geopolitical level, the U.S. and India see each other as potential counterweights to a rising China, especially in the Indian Ocean region," said Miller.

"With respect to trade and economic interests, American businesses and investors are very interested in participating in what they expect to be rapid Indian economic growth over the next decade or two," he added.

By CNBC.Com's Dhara Ranasinghe; @DharaCNBC

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