BREXIT and India

The impact will be more about sentiments than fundamentals…

The RBI and the Finance minister have been categorical that the Indian economy is well prepared to handle the aftermath of the BREXIT vote. Over the longer term, the impact of BREXIT may not be too acute, but in the short term the sentimental impact will surely be strong; and that cannot be wished away. There are 3 such implications…

Fed rate hike may be put off… 

The immediate implication of the BREXIT vote may be that the US Fed may choose to put off rate hikes till the dust over the EU settles. The BREXIT will immediately lead to a weakening of the UK£, as is already evident. Its losses versus the Euro and the US$ could actually widen going ahead. The trade related losses alone could wipe away anywhere between 0.5-1.0% from the annual GDP growth of UK. EU will also feel the pressure of losing out on the lucrative UK business and its robust markets for debt, currencies and equities. Both the EU and UK could face a slowdown in growth for the next couple of years. With the tumult in Europe, the Fed would prefer to wait in the sidelines. A rate hike looks almost unlikely in this calendar year.

It could be about flows… 

The big story as an outcome of the BREXIT could be the shift in flows from risk-on to risk-off. One of the classic precursors to the shift to risk-off is the rise in the price of gold. We have already seen safe-haven demand for gold taking the prices higher. Oil prices have fallen on fears of a slowdown in oil demand from UK and the EU. Both are large consumers of oil and the EU is a very large net importer. This clearly points towards a slowdown in demand from these two key regions. The UK exiting from the EU would lead to substantial chaos across financial markets accompanied by heightened volatility. This is already evident from the VIX, which has shown a sharp uptrend. There will be clear outflows from risky assets in emerging markets into developed markets. That could have negative implications for economies like India.

Some sectors could get hit…

Apart from the macro effects related to flows and global rates, specific sectors in India are likely to be hit. The auto ancillary, pharma and IT companies have fairly strong exposure to the UK market. Specific companies like Tata Motors, Tata Steel, TCS, Tech Mahindra, Bharat Forge and Motherson Sumi will see a dent in their performance. However, companies with payables in UK£ are likely to benefit from the BREXIT vote as the pound is likely to stay weak in the coming months. The impact on India could be more in the short to medium term. In the long run, the fundamental attractiveness of India should hold it in good stead. BREXIT should not be a big worry for India. ©

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