The ‘Leave’ vote for Britain from the European Union under the ‘Brexit’ referendum scheduled for June 23 would surely unnerve the global financial markets, leaving strong ripples for the Indian markets as well, necessitating a contingency plan by the government and the Reserve Bank of India, an ASSOCHAM Assessment Paper stated.
Since it is expected to be a close call between the ‘Leave’ and ‘Remain’ votes in the referendum which has emerged as a major risk related event for the global economy, the ASSOCHAM paper has said, “There could be an upheaval in the financial markets out of sheer panic, at least in the short term.”
It said the Brexit event is coinciding with the concerns over a possible outflow of USD 20 billion due to redemption of the FCNR deposits , though the current account situation at this point of time is quite comfortable thanks to lower bill of imported crude oil for the last over 18 months.
“With London being a nerve centre for the global firms, a fear factor has gripped the entire financial world. As a key emerging market and the one which is being preferred by the global fund managers, India could witness wild fluctuations or large outflows in sync with an overall trend. That is something to watch for,” added ASSOCHAM.
It expected the RBI to be ready with a contingency plan for effective intervention if there is a pressure on the dollar supply because of outflows of funds from the emerging markets.
“However, in the medium to long term, the funds shuffled in an uncertain Britain and European markets could find way into the Indian markets, but in the immediate term, anything can happen and as a credible economy, we have to be ready and be on top of the situation,” ASSOCHAM said with full confidence in RBI Governor Dr Raghuram Rajan.
When it comes to merchandise trade and foreign direct investment (FDI) , there are no big issues in the short to medium term as in the case of ‘exit’, the Britain and EU would have to negotiate the terms of separation over a period of two years.
According to one school of argument, UK would find it easier to negotiate and sew up a Free Trade Agreement with India and similar arrangements with China and other fast emerging economies, unlike protracted India-EU trade negotiations stuck for over nine years without any tangible results.
The India-EU trade deal is stuck also because of red tape and complicated bureaucracy and absence of convergence among different EU member countries’ interest. “On the other hand, a trade opening pact can be reached with Britain within a matter of months,” the ASSOCHAM paper said.