As Britons voted to exit the European Union, its decision radiated around the globe on Friday, blowing up a storm in financial markets that may take time to die down.
As Britons voted to exit the European Union, its decision radiated around the globe on Friday, blowing up a storm in financial markets that may take time to die down and retarding prospects for a recovery in world trade. However, India stood as a bright spot with global investors betting on the nation’s strong economic fundamentals.
Jacob Nell, UK economist of Morgan Stanley, said: “Our most preferred countries are India and Korea.”
The note from Morgan Stanley said that it sees protracted political and economic uncertainty, leading to a weaker GBP, higher inflation, and a hit to growth. “This event does not in itself trigger a global recession, but our economics team forecast prior to the vote that global growth would likely be 3.1% in 2017 in a “medium stress” UK exit scenario versus 3.4% in the base case; this is due mainly to the impact on European growth and global financial conditions tightening,” said Nell.
This sentiment was echoed by American businessman and chief economic adviser at Allianz, Mohamed A. El-Erian. He said: “India is better placed to navigate volatility on account of Brexit. Equity, sovereign bond, currency markets will come under pressure in the near-term.”
HSBC Global Research in a note said, “Asia is in a reasonably strong position to withstand the latest tremors from Europe. Broadly, the impact should prove manageable. But, at the margin, is should be the external trade and finance (or debt-) dependent economies that feel the biggest squeeze: Korea, Japan, Taiwan, Malaysia, Singapore, Hong Kong, and Thailand. More insulated, at least in growth terms (if not in terms of FX volatility) should be India, Indonesia, and the Philippines. China and Vietnam are somewhere in between.”
Analysts are also hopeful of economic reforms from the government, including potentially a revamped national goods and services tax.
Jimeet Modi, CEO, SAMCO securities said, “While markets are jittery, this is a god sent event, especially for Indian investors. While we saw a steep fall in the indices, the trajectory of Indian markets remains upwards.”
“The exit of Britain from the EU does raise questions and jitters, there are fears of a cascading effect occurring politically as well. Other EU members like the Dutch have already asked for a referendum & the very existence of the EU is now being questioned. There will be volatility in the currency, but as we cut across the noise, we must understand that the exit is not so simple. There will be negotiations in Brussels and the process itself could take a long time,” added Modi.
Jayant Manglik, President, Retail Distribution, Religare Securities, said “The progress of monsoon in India so far is satisfactory. Another positive is the latest policy announcements to encourage FDI in several sectors. There is also a possibility for passage of GST bill in the upcoming monsoon session of the parliament.
So if we put together the immediate negatives from global markets and recent domestic developments, we’re no doubt in a better position to absorb this setback and rebound quickly.”
“INR should perform better as compared to emerging market peers,” said Ashtosh Raina, head of forex at HDFC Bank in Mumbai. “Rupee should be around present levels and worst case, may go to previous lifelow but RBI should be able to control it.”
Aditi Nayar, Senior Economist at ICRA said, “Post-Brexit uncertainty may weigh upon the performance of merchandise and services exports and delay the concretization of investment plans, partly moderating the expected benefit of the recent FDI reforms. The extent of disorderliness in global markets and risk aversion as well as political developments in the European Union would determine the level of contagion in the Indian financial markets as well as the impact on Indian economic growth, although domestic consumption would largely cushion the latter. On balance, there are modest downside risks to our forecast of an improvement in growth of India’s GVA at basic prices to 7.7% in FY2017.
High foreign exchange reserves in historical terms, moderate short term external debt even after accounting for the upcoming FCNR(B) redemption, and a narrow current account deficit limit the vulnerability of India’s external account.
Credit Suisse in a note said, “The British people have voted to leave the EU. This outcome will lead to a rise in political risk across Europe. Beyond the UK, the precedent that the UK referendum outcome sets for other European countries disillusioned with the European Union will lead to questions about whether other countries (i.e. Sweden) may be next to demand a referendum.
Finance Minister Arun Jairley and RBI governor Raghuram Rajan said a solid economy and planned government reforms would allow the country to withstand any major impact from Britain’s vote to leave the European Union.
Meanwhile, Economic Affairs Secretary Shaktikanta Das said, “We have enough firepower to deal with the situation. And the fire-power will be used judiciously in a manner that we maintain stability if our economy.”
While Finance Secretary Ashok Lavasa said the government and RBI are ready with measures to curb volatility, Banking Secretary Anjuly Duggal stated that Brexit will not impact India in medium or long term.