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Impact of Brexit on In

Pratibha Mishra

According to a Development Bank of Singapore (DBS) report, Brexit might embolden groups in other European countries who want referendums to break out of the EU too. Weak Asian currencies (all currencies except the Japanese yen) might take a hit if other EU countries start following the Britain’s suit. Investors will also be averse to take risks at such a moment across asset classes.

Let’s see what Brexit might mean for India:

Direct Trade Impact on Indian Rupee is likely to be limited

India’s rupee is not likely to suffer much from the direct trade impact when it comes to UK but in the near term, it will of course respond to the global risk. The Kotak Economy Report has already revised the 2016-17 average US dollar target from Rs 67.9 to Rs 68.5.

It was noted that a week after Brexit, Foreign Portfolio Investors (FPIs) outflows rose to Rs 539 crore. Domestic Institutional Investors (DIIs) pumped in Rs 1,068 crore to stabilize the financial markets but it might not be enough if the FPI outflows accelerate. There are two other major events that might impact the global markets – the expected rate hike by the US Federal Reserve, and the Foreign Currency Non-Resident (FCNR) fixed deposit redemption which is due in September. However, experts feels that the FCNR redemption might not impact us much has the Reserve Bank of India (RBI) has accumulated enough forex reserves.

In the past few sessions, foreign institutional investors (FIIs) have already cut down their India exposure by selling their equity and rupee debt. This might work in India’s favor in the long run as it already needed a deep correction.

Lakshmi Iyer, Chief investment Officer – Debt at Kotak Mutual Fund says, “The central bank intervention to keep the volatility of the financial markets to the minimum can’t be ruled out. Since global liquidity situation is likely to improve soon, the interest rates may see a positive impact.” However, accelerated rate cuts by the RBI might not happen soon as it can weaken the currency and increase inflation – causing consumer price index (CPI) and wholesale price index (WPI) to bounce up higher.

It has been noted that for every 100 basis points (bps) depreciation in the currency, the CPI bounces up by 1,720 bps and the WPI rises up by 2,225 bps.

India’s GDP Growth might be slightly lower this year

According to the Nomura Report, the 2016 GDP growth forecast for Asia (except Japan) has been lowered from 5.9% to 5.6%. For India, the growth forecast has been reduced from 7.6% to 7.3%. However, Indian investors should not worry too much about it as we remain the fastest growing major economy of the world.

The government has taken several steps to boost the GDP growth, including the liberalization of the Foreign Direct Investment (FDI) policy. Opening up of civil aviation, defence and pharmaceutical sector to FDI is being seen as positive moves in this regard.

From a long-term view, Indian economy is doing quite well and hence, investors have little to be afraid about. Dipen Shah, Senior Vice President, Private Client Group Research says, “Indian markets are likely to perform better than most other emerging markets or even developed markets.”

Indian Exports take a hit

The uncertainty in the EU countries, and how China, Japan and other Asian countries might react to it – have negatively affected the Indian exports. The currency of China – the renminbi – is facing depreciation due to capital outflows. The EU is the largest export destination for China. If Chinese industry gets hit, it might hurt India’s domestic industry too.

The eurozone has recovered from a prolonged recession in 2014. The broad-based recovery it was experiencing, might get hit due to the results of the UK referendum which will affect both businesses and households in the region. The intra-eurozone imports were on the rise as the domestic private consumption was increasing. Exports from the US, China, Japan and India were increasing.  If the eurozone faces slowdown, Indian exports will be affected too.

More than half of India’s exports are sent to emerging markets, and hence, the slowdown in China will affect India too.

Sector-wise Impact on India

Indian businesses prefer to operate from the UK as its language and laws are familiar to us. It is easier to get hard currency funding there, and Europe used to be accessible from there. Such businesses might get impacted now. They will need to set up offices in other European countries, and learn local languages there to access their markets.

In its bilateral trade with Britain, India earns a surplus of about $3.64 billion. In the Financial Year (FY) 2016, India’s exports were worth $8.83 billion while its imports were worth $5.19 billion. In the month of April 2016, the exports to Britain were 17.66% of our total exports, while imports from the UK were just 1.45% of our net imports of the month.

The major exports to the UK are textiles and clothing, followed by machinery and auto ancillaries.

In the pharma sector, India’s top export destinations are the US, the UK, and Europe in that order.

As the rate of ‘pound’ falls against the ‘dollar’, all companies earning income from the UK and Europe will get affected in the short term at least. So, the rupee is falling too.

Companies who mainly earn from European markets might take a greater hit. On the other hand, imports from the Britain are likely to get cheaper and these mainly include spirits, and rough uncut diamonds.

In broader perspective, Brexit will have a lot of consequences that might change how things and finances work in our world. Here are some of the things we should be aware about:

Impact of Brexit on the Britain and other European Countries

Britain is more an importer than exporter. Though it is a major economy, it is low on resources. It is dependent on China, India, and the rest of Europe to meets its domestic demands. Exiting the EU might mean that it might look into emerging markets like China and India to strengthen its trading network. It might also choose to enter into bilateral trade agreements with other European nations to meet its demand. It will take Britain two years or more to work through the exit modalities and be back on track.

Other European countries consider London as their financial hub, as it allows them access to capital markets of the world. With Britain leaving European Union, they will have a limited access to capital markets.

Currently, Britain pays about 8.5 billion pounds as EU membership fee (after deducting the expenses). The country will save on it, which might result in additional collection of duties Britain imposes on its imports. 

There is no way to quantify how the UK will be affected by Brexit yet. It still has to re-negotiate its relationship with the EU and the rest of the world. It is likely that if the Britain will go into recession, it will pull down the global economy with it.

Indian economy may feel the heat temporarily but our limited exposure will keep us safe from any long-lasting effects of the event. 

 

(Views expressed are personal)