Knee-jerk or insulated? How Brexit will impact Indian markets, rupee

By: and |
Updated: June 14, 2016 12:23 PM

The BSE Sensex and NSE Nifty fell for the third straight session on Monday on renewed worries about the impact of Britain’s June 23 referendum ahead of US Fed meet.

Brexit - How Indian markets will reactThe BSE Sensex and NSE Nifty fell for the third straight session on Monday on renewed worries about the impact of Britain’s June 23 referendum ahead of US Fed meet.

Brexit worries continued to rattle global markets, including India, as the June 23 referendum date neared. The possibility that Britain could exit the European Union (EU) could slow down the world’s economy, according to analysts and will have far-reaching consequences for politics, economy, defence, migration and diplomacy.

Brexit is seen as the next big financial event post 2008 global economic crisis. According to analysts, following Brexit, if that happens, Britain and the EU may form a European Economic Agreement including free trade agreement. Britain will still be a prominent member of the Council of Europe, UN, G8, NATO, IMF, and Commonwealth. Further, Britain will regain its seat on the World Trade Organisation – a platform for forming new trading relationships, especially with commonwealth nations replacing those with the EU.

ALSO READ | Brexit: Here are 5 things you want to know about it

In the event of Brexit, Britain may consider strengthening its ties with other emerging economies not only in Asia, but also in Africa and South America.

Most of the opinion polls on whether Britain should leave or stay have showed a lead of the “Leave” campaign over “Remain”.

A referendum means a voting process in which a person of voting age can participate either in favour or against a question or issue. The side which gets over half of all votes cast is considered to have won.

Indian markets like their global counterparts are also feeling jitters over Brexit worries. The BSE Sensex and NSE Nifty fell for the third straight session on Monday on renewed worries about the impact of Britain’s June 23 referendum ahead of US Fed meet. Sensex closed 238.98 points down at 26,396.77, while Nifty 50 index settled 59.45 points down at 8,110.60.

Experts are mixed about the impact of Brexit referendum outcome on domestic equity markets – on whether there will be a knee-jerk reaction or the markets will remain insulated. However, they said in the longer run the move will not affect markets, only Indian companies operating in Europe especially in UK may see further slowdown in their business.

“Brexit event outcome will have knee-jerk reaction on the Indian markets, however, in longer term it will not affect, but would give investors a buying opportunity,” independent market expert Ambareesh Baliga said.

While G Chokkalingam of Equinomics Research has a different view to give and feels that Indian markets would largely remain insulated from Brexit event. He said, “European economy which has already slowed down its growth over last few years hasn’t increased capital exports to india substantially. So Indian markets would to a large extent remained insulated from Brexit.”

India companies operating in Europe, especially in UK could see some slowdown in business. Chokkalingam said, “Brexit could cause fall in capital flows into UK from rest of Europe. Since UK already has high current account deficit reduced capital flows might affect its currency and economic growth. However, weakening of its currency might affect exports from rest of Europe into UK and thereby economic growth of European Union. Hence, whole euro could see some slip on growth and hence Indian businesses operating in Europe.”

India currency may also see volatility due to Brexit event. Jamal Mecklai, CEO, Mecklai Financial in a column that appeared on Financial Express said that like all other risk assets, Indian rupee will also be affected. He said,” On Brexit, the rupee, like all other risk assets, will take a hit. India’s relative attractiveness may limit the impact, particularly if that other “known unknown”—Rajan remaining as RBI Governor—turns out positively.”

Dipen Shah, senior vice-president and head private client group research, Kotak Securities further added, “Going ahead, markets will look at important events such as the Fed meeting and the referendum in Britain. The referendum has created concerns with some polls showing a bend towards ‘Leave’ over ‘Stay’. A ‘Brexit’ scenario has the potential to create volatility in global markets, especially in the currency markets.”

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