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  1. Brexit impact on India: From a ‘reverse safe haven’ to ‘no major currency war’

Brexit impact on India: From a ‘reverse safe haven’ to ‘no major currency war’

The immediate (one-two days) effects of the referendum are due mostly to the forecasting error made by betting markets (those who put their money on the line).

By: | Published: June 27, 2016 6:23 AM

Two leading economists on Brexit’s India impact

Arvind Virmani, former Chief Economic Advisor

A ‘reverse safe haven’?’

How do you evaluate the impact of Britain’s exit from the EU on the rupee, India’s foreign trade, capital flows into and out of the country, the bond markets and the overall economy?

The immediate (one-two days) effects of the referendum are due mostly to the forecasting error made by betting markets (those who put their money on the line). Most of the short-term capital movements vis-à-vis India will be adjusted in a couple of days and won’t be very significant.

The rupee-US dollar rate will depreciate by approximately the same percentage as the dollar depreciates against the broad index.

Unlike earlier shocks, this shock was known but its probability was underestimated. I believe that many observers are overestimating the direct economic effects of Brexit based on earlier economic shocks. The heightened risk in this case arises mostly from the uncertainty in predicting adverse politico-economic developments in the EU and in the US elections.

These will of course have economic consequences: increased risk will likely result in lower real investment and consequent further weakening of growth impulses in developed countries.

This will, however, have little net effect on India because of the offsetting effect of slower rise in oil prices and continued weakness in demand.

If economic reforms continue at a steady pace, there could be larger surge of capital inflows into India due to a “reverse safe haven” or “relative economic opportunity” effect.

How should the government and RBI deal with the aftermath of Brexit?

The RBI and other central banks have had many experiences of shocks and by now they know well how to minimise any financial contagion by ensuring liquidity.

How serious is the possibility of competitive devaluation of currencies?

Most countries will let markets adjust to the new expectations. Some such as China, which do not really have a market-determined exchange rate, may use this occasion to nudge its exchange rate a little lower, but not enough to cause any widespread alarm.

Dharmakirti Joshi, Chief  Economist at Crisil

No major currency war risk’

How do you evaluate the impact of Britain’s exit from the EU on the rupee, India’s foreign trade, capital flows into and out of the country, the bond markets and the overall economy?

Brexit is unlikely to have a notable impact on India’s GDP growth in fiscal 2017, and we retain our forecast at 7.9%, with agriculture being the swing factor. We do not see much impact on India’s overall trade as trade with the UK is only 2% of India’s total foreign trade.

The initial impact on the capital markets has already been felt. As the process of the UK’s exit from euro zone will be spread over next couple of years, we could see more volatility depending on how negotiations proceed. The interest rates will have a softening bias.

How should the government and RBI deal with the aftermath of Brexit?

The government should continue with its reform agenda to keep improving India’s pull factor, while the RBI should provide liquidity support to curb volatility.

How serious is the possibility of competitive devaluation of currencies?

It all depends on how the impact of Brexit plays out. I do not foresee competitive devaluation of currencies as a major risk at this juncture.

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