Britain’s decision to leave the European Union is roiling the global currency, commodities and financial markets quite seismically. Call it the price of “Globalisation, where volatility and uncertainty are the new norms,” as Finance Minister Arun Jaitley puts it. India too endured its share of pain but the limited bloodbath witnessed within its financial markets reaffirmed the resilience of its strong economic fundamentals. Analysts feel that the pain of Brexit might well be a gain for India if its ongoing reform momentum is maintained. “India could be an anchor of stability, given that a proactive government has carried out reforms at a satisfactory pace and that its macros are well under control,” feels Anuj Puri, chairman & country head, JLL India.
While all major global equity markets tanked up to 10%, the benchmark indices in India closed 2.2% lower. Currencies, especially belonging to emerging markets, took a hard hit with many sliding by over 3%. The slide in rupee (about 1%) was more stable than its peer group largely due to the RBI’s intervention. “We have resources to mitigate the rupee slide,” assured RBI’s outgoing Governor, Raghuram Rajan. Many fear that Brexit might trigger an ugly currency war among competing nations. India needs to keep its exchange rate stable to keep foreign investors’ interest alive in its economy which has a rare potential to grow by 8-9% in the medium term.
“But as we speak, a great degree of uncertainty looms large on our heads,” says Chirag Mehta, senior fund manager, Quantum AMC. “What may perpetuate such uncertainty is contagion with other nations in the EU, getting emboldened and deciding to leave the failed experiment known as the European Union.” Meanwhile, the heat of Brexit caused gold to shine-up by about 6%. The prospects of gold, considered as a safe haven asset in such uncertain times looks more promising. Analysts, however, caution that until the full impact of Brexit is known, the ongoing carnage is expected to keep the volatility around for quite some time. The fear of severe economic slowdown and trade protectionism in much of the connected world looks real as suggested by the fall of over 3% in crude oil prices. While such a fall benefits India but rupee’s further slide may erase such a gain. India’s IT industry, which derives about 20% of its revenues from UK, might take a big hit as sterling weakens. Time taken to reorient their business lives as per the changed landscape is also expected to hit the profits of India’s IT industry for at least couple of quarters.