Brexit: All you need to know about the India impact of the referendum

With the pound expected to fall 20 percent in case of a Brexit, Indian companies with sizeable presence in the UK will have to bear the brunt

FP Staff June 23, 2016 10:34:16 IST
Brexit: All you need to know about the India impact of the referendum

The D-day has arrived - the day Britons will decide whether to stay on or leave the European Union.

According to a Reuters report, the 'Vote Leave' and 'UK stronger in EU' camps are neck and neck - 45:44 percent in the last poll published by Opinium.

The vote, which echoes the rise of populism, will shape the future of Europe. A victory for "out" could unleash turmoil on financial markets.

Brexit All you need to know about the India impact of the referendum

People campaigning for Brexit. AP

A vote to exit the European Union in the referendum could leave Britain's economy more than 5 percent smaller by 2019 than if it stays in the 28-nation club, said the International Monetary Fund last week.

In an article in The Wall Street Journal, Greg Ip termed the possible exit of the UK from EU as "the starkest repudiation yet of the postwar consensus favoring ever-deeper global integration".

"A further unraveling would undermine global growth prospects already clouded by aging populations and miserable productivity," he said in the article.

Indeed a decision to exit will have a deep impact on the global economy and in turn on India.

Here's a low down on what Brexit means for India and how the country is dealing with it:

India-UK connection: A note by Deloitte in May said India is the third largest source of FDI to the UK in terms of numbers of projects, with 122 projects encompassing inward investment in the last financial year, an increase of 65 percent from the previous year, which lead to the creation of 7,730 jobs and protection of 1,620 jobs. According to the consultancy firm, key sectors attracting Indian investment include healthcare, agritech, food, and drink. "There are an estimated 800 Indian owned businesses in the UK, including companies like Tata Motors, with more than 110,000 employees. Further, the UK is also India’s largest G20 investor," it said.

IANS, meanwhile, says that Britain ranks 12th in terms of India's bilateral trade with individual countries. It is also among just seven in 25 top countries with which India enjoys a trade surplus.

"India invests more in the UK than in the rest of Europe combined, emerging as the UK's third largest FDI investor. Access to European markets is therefore a key driver for Indian companies coming to the UK. Anything that lessens this attractiveness may have a bearing on future investment decisions. It is important also to ensure continued border-free access to the rest of Europe for the many hundreds of existing Indian firms that have base in the UK," Chandrajit Banerjee, director general of Confederation of Indian Industry (CII) has been quoted as saying in the IANS report.

So clearly, India will see a major impact, if the UK indeed decides to leave the EU.

Forex outflow: One of the major impact is going to be the outflow of dollars. If the UK decides to exit, foreign funds are likely to move out of the riskier markets like India. What is required in such a scenario is forex reserves. India's foreign exchange reserves hit a record high at $363.46 billion for the week ended 3 June.

The finance ministry said on Wednesday the country has sufficient foreign exchange reserves to handle any impact. RBI Governor Raghuram Rajan said the central bank will infuse whatever liquidity is needed into the Indian market to keep it "well behaved".

On Monday, after RBI governor Raghuram Rajan made his intention clear that he wouldn't serve a second term at the central bank, the rupee had fallen to a month low. The RBI's intervention by selling dollars had averted a deeper decline. However, many analysts expect the rupee to decline further.

"We expect the RBI intervention to smooth any INR volatility. In case of BREXIT later this week, it would likely allow any US Dollar strength to play out. Our Asia FX strategists expect the INR to depreciate to Rs 68.5/USD in September from Rs67.3/USD today," Bank of America Merill Lynch said on Monday.

Impact on companies: Nasscom recently said a Brexit will have a negative impact on the $108 billion Indian IT sector in the short term. However, it said the exact nature and extent of the impact will emerge over a longer period of two years or more.

"An initial analysis indicates that the impact on India's technology sector may be mixed; clearly negative in the short term and harder to discern in the longer term with either scenario having some positive and some negative points," Nasscom said.

However, leading IT firms such as TCS, Infosys, Wipro and HCL Technologies have not commented on the issue yet. Tech Mahindra, meanwhile, said the company will "wait and see what the outcome of the referendum is" and then assess the situation.

With the pound expected to fall 20 percent in case of a Brexit, Indian companies with sizeable presence in the UK will have to bear the brunt.

A report in the Deccan Chronicle says the stocks that would face turmoil include that of Tata Steel, Tata Motors, Tech Mahindra, Bharat Forge, Motherson Sumi, Infosys. Hindalco, Wockhardt and Mindtree. Apart from these, the Indian Depository Receipts of StanChart are also likely to get impacted negatively.

Jaguar Land Rover, Britain's biggest carmaker and Tata Motors subsidiary, estimates its annual profit could be cut by 1 billion pounds or $1.47 billion by the end of the decade if Britain leaves the European Union, said a Reuters report.

As Deloitte explains in the note, one of the key factors, among others, that attracts Indian enterprises and their investment into the UK is the gateway that it provides to the EU.

"Majority of Indian businesses chose to locate their European offices in the UK, to gain the ease of operating in the UK and avail the benefits while still remaining a part of Europe. Removing this gateway would be problematic for Indian businesses in the UK, who may choose to relocate and direct investment someplace else," it said.

Sebi's preparedness: Sebi and stock exchanges have beefed up their surveillance mechanism to deal with any excessive volatility. The domestic capital market has a robust surveillance and risk management framework in place and it has been beefed up to deal with any eventuality emanating from the 'Brexit' referendum, a senior official said.

The official said Sebi and the bourses would keep a close tab on manipulators looking to exploit the volatile trends expected in stocks and derivatives, including those linked to the rupee's movement against other foreign currencies. A strict vigil would also be kept on brokers, portfolio managers and other market intermediaries for any attempts to lure small retail investors into promises of hefty gains from the futures and options trading, especially in banking stocks and indices, the official added.

With inputs from agencies

Data support Kishor Kadam

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