Outlookindia, June 24, 2016
The initially uncertainty created by majority of Britons voting against staying on in the European Union, saw global markets react adversely at the onset before recovering slightly. In India, the Sensex fell by 604.51 points or 2.24 per cent to end at 26,397.71 while the Nifty fell by 181.85 points or 2.2 per cent to 8,088.60 at 3.30 pm, while the rupee breached the 68-level against the US dollar in morning trade.
In an interview to ET Now, the RBI Governor Raghuram Rajan tried to calm the market stating, “RBI was in touch with other central banks across the globe and sees no immediate impact on the rupee, and that the central bank would provide enough liquidity if there was volatility.”
The market volatility had been expected given Britain”s sphere of influence and what the referendum results mean for the future of the European Union, which was formed to create a unified market that would allow seamless trade and travel among member countries. The future moving away of one of the biggest economies in the union is expected to see some of the other member nations like Scotland among others reviewing their continuance in the Euro zone.
“What it means to other Euro nations is significant amount of realignment or arrangement of those struggling nations of Euro zone which is going to remain a large uncertain factor and could create further crucial unrest in those economies,” states Deven Choksey, Managing Director of KR Choksey Shares and Securities Pvt. Ltd.
Choksey expect that in the “near term, India per se could remain volatile on account of possibility of outflows to fulfill the collateral damages to the investors due to global situation that is affecting the financials. There may be bouts of selling pressure, there may be bounce back under those selling pressure, in a very sharp manner. This is one area where one should play cautious.”
The UK has been one of India”s major trading partner and a gateway to the European Union. Over the last several years, Indian companies have also emerged as major investors in Britain including through mergers and acquisition route. Last year, Indian investments in UK rose by 65 per cent, making it the third-largest source of FDI in the country. According to a CII study, India invests more in the UK than in the rest of Europe combined. Currently around 800 Indian firms operate from Britain, providing thousands of jobs.
As pointed out by Foreign Minister Sushma Swaraj, EU leaders have already suggested that with Brexit, India will be treated as a third party and will need to engage with EU to gain access. This means many of the companies with a base in Britain will have to revisit their business strategies and consider relocation for better accessibility to the EU. The challenges of Britain”s exit from EU are many not the least on migration, besides trade in goods and services.
Vikram Murarka, Chief Currency Strategist at Kshitij Consultancy Services, stresses, “In the short-term (few days) we may see volatility die down a bit as the market players go back to their drawing boards to re-draw what the future looks like. In the longer term, we have to see whether the Yuan will weaken in sympathy with weakness in the euro and pound. If so, the rupee may also weaken in response.”
India currently enjoys a positive trade surplus of around US$ 3.64 billion with the UK. The depreciation of the British Pound will obviously affect exporters and importers. However, that will be very short-term phenomenon, states CUTS International in an analysis. The international organization, which promotes fair market practices, foresees no immediate impact on India’s trade with the UK. “In the medium to long-term, India”s export to the UK is expected to increase as there may be trade diversion in favour of India from other (remaining) EU countries. Similarly, India”s import from the UK is expected to increase as there may be more incentive to British exporters to further explore the Indian market. Overall, there will be trade creation for India,” states CUTS International.
The corporate sector in India too is not unduly worried about any negative impact of Britain’s exit from EU. “We expect a greater period of volatility in the days ahead while the trade and investment implications for India and the rest of the world become evident. We expect this to stabilise soon,” the Federation of Indian Chambers of Commerce and Industry (FICCI) said in a statement. Echoes Confederation of Indian Industry (CII) president Naushad Forbes, “India will not be affected due to Brexit if we look at a mid to long term perspective.”
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