Carnage in India as UK votes itself out of EU

By: | Updated: June 25, 2016 8:32 AM

Britain’s decision not to remain in the European Community (EC) rattled global financial markets on Friday, plunging the world economy into a prolonged period of uncertainty.

Governor Raghuram Rajan reassured the markets redemption of  billion worth of FCNR(B) deposits, starting in September this year, would not be a worrisome event. (Reuters)Governor Raghuram Rajan reassured the markets redemption of billion worth of FCNR(B) deposits, starting in September this year, would not be a worrisome event. (Reuters)

Britain’s decision not to remain in the European Community (EC) rattled global financial markets on Friday, plunging the world economy into a prolonged period of uncertainty. Currencies capitulated, stocks sank and treasuries rallied, leaving investors jittery as it became clear the EC might see more exits. The British pound plunged to a 30-year low.

Back home, the Sensex crashed more than 1,000 points before clawing back to levels of 26,397.71, a loss of 604.51 points. The rupee fell below the 68 mark but recovered some ground to close at 67.9600 to the dollar, partly on Reserve Bank of India (RBI) intervention. Governor Raghuram Rajan reassured the markets redemption of $26 billion worth of FCNR(B) deposits, starting in September this year, would not be a worrisome event.

Economists at Bank of America wrote recently they expect banks should be able to fund $10 billion of outflows in September. “If Brexit stalls capital flows, we expect the RBI to roll over the FCNR(B) scheme,” they noted. The governor observed on Friday it might be premature to talk about a new rollover facility.

Also Read: Brexit: As UK walks alone, India shrugs off impact

While India’s reserves, in the week to June 17, stood at $363.83 billion, an all-time high, there is some bunching up of forex repayments by banks and companies towards the end of the year.

India, experts said, could not escape the contagion effect even though its macroeconomic fundamentals are better than those of its peer economies. Portfolio flows could taper off with foreign investors moving money to safe havens. So far in 2016, foreign portfolio investors (FPIs) have bought equities worth $2.8 billion compared with $3.2 billion in 2015. FPIs have sold rupee bonds worth $1.84 billion in 2016 so far; in 2015 they bought bonds worth $7.56 billion.

Although falling prices of commodities, especially crude oil, will be a big positive, a global slowdown could mean that exports — which have fallen 18 months in a row till May — could remain weak. Moreover foreign direct investment could be impacted.

“While businesses wait to see how the mechanics of exiting the EU will actually be implemented, they may hold off on new investment, especially if that new investment is contingent on Europe’s economic outlook and if European aggregate demand is negatively impacted,” economists at HSBC opined referring to Asia.
With the volatility in financial markets unlikely to die down in a hurry, Hitendra Dave, head, Global Banking & Markets, (India) HSBC, believes the rupee will stabilise as and when the world markets settle down. “However, investors will differentiate between markets and the impact on India’s capital flows may not be that severe,” Dave observed.

In the offshore market, the one-month non-deliverable forward (NDF) was trading at 68.43 to the dollar, down 1.12%. Currency expert Jamal Mecklai observed the uncertainty in financial markets was likely to persist given how the EC could see a shakeout with more members leaving and new ones coming in. “We’re perched on the edge of a new world,” Mecklai said. The rupee should, however, manage to remain relatively stable compared to its peers, he added, pointing out a lower value for the rupee might not be such a bad thing at a time when currencies of competing nations are weakening.

Currency expert AV Rajwade said the appointment of a new governor was adding to the uncertainty. “Till we know about the new governors we have a vacuum of sorts and it is hard to predict a level for the rupee,” Rajwade observed.

Andrew Holland, CEO, Ambit Investment Advisors, believes the UK exiting the EU might have far reaching effects on the world economy, including that of India’s, and it was way too early to gauge them accurately. “It’s a huge negative shock. The ramifications are far reaching. Globally, central banks are dictating policies and people are tired. The fear now is that Europe could disintegrate,” he observed

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