So, the Brits have decided to say goodbye to the European Union (EU) and choose ‘independence’ even though it meant risking their political and economic future. Once the decision is ratified by both EU and British Parliament, Britian will have to rework its trade, economic relations with the EU and also the rest of the world, including IndiaWhat does it mean for India?
Short-term volatility in stock, rupee and bond markets (Sensex tanked 1000 points at the opening while the rupee touched a low of 68.22 against the dollar) and intense speculations and uncertainty among Indian entrepreneurs on what would the new trade equations between the UK and India mean to them. There are around 800 Indian companies operating in the UK which employs about 1,10,000 people. It’s not just the Tatas and Infosys.
There are several firms across multiple sectors including pharma, IT and financial services that are operating in the UK. Will an ‘independent’ UK mean more employment restrictions for foreigners and barriers for companies to access the Europe? After all, Indian firms preferred UK since it has been a gateway to rest of the Europe. One has to wait and watch for the larger contours of UK-Europe divorce deal to know the answers to the above questions. Also, India is the third largest foreign direct investment (FDI) source for the UK and a major trade partner for that country. Indian firms in UK might have to recalibrate their operations in the UK to align with the new Euro zone order.
The good news is that the vote still has to be passed by Parliament and Article 50 invoked before negotiations start with Europe over an exit and could take up to two years. That’ll give ample time for Indians to align with the changed circumstances. Globally, the Brexit might discourage the US Federal Reserve from raising their interest rate in a hurry and global currency markets may go for a readjustment depending on how the sterling-euro readjustment happens. The crude oil market also might show some impact in the short term. Whichever way, there is an element of uncertainty that the Brexit will bring to emerging markets including India.
For India, this is also a big reminder why the country needs to have a stronger Reserve Bank of India (RBI) to deal with a life amid extreme volatile markets and eventuality of massive cross-border capital exodus that may arise. The Brexit may not be the last of the global shocks for India. There may be further realignment in the euro zone itself. There is a big unseen problem brewing in China and the unwinding of easy monetary policies is underway in the US. An uncertain world is a big reminder to Prime Minister, Narendra Modi that he has an unenviable task of bringing a credible face to succeed Raghuram Rajan on the 18th floor of RBI headquarters at the Mint Road.
The simple reason is in a volatile world, investors look for credibility of the economies more than anything. If the government appoints a ‘yes man’ who would always toe the government line and lacks the ability to act as a corrective force on economic matters to the government, that may widen the trust deficit of world with India. Already India’s official growth numbers are seen with an element of suspicion.
In this scenario, individuals at key positions matter just as institutions. “Rajan was extremely well qualified with thorough knowledge of international financial markets. He was a great asset to have. While the RBI, as an institution is stable and resilient, the fact is that individuals do matter. Some individuals have more credibility. The moot question is who comes next succeeding Rajan,” said D K Joshi, chief economist of rating agency, Crisil, the Indian subsidiary of global rater, Standard and Poor’s. Most economists and economy watchers agree with this view.
The fact is that India continues to be a vulnerable economy to international shocks as we have seen in the past during the Fed rate hike rumors and Chinese tremors. Rajan’s appointment as the RBI governor in September 2013 has indeed helped to address the problem of trust deficit India faced at that point in time. The rupee, which fell to a lifetime low of 68.85 on 28 August, 2013, recovered sharply and financial markets regained stability. India is in a much better position today to absorb global shocks than it was in 2013. On Friday, the rupee lost considerable ground and slumped to a 4-month low intra-day to hit 68.22 level against the dollar, down 97 paise or 1.43 percent over the previous day’s close of 67.25.
Rajan reiterated this in a statement on Friday. “The Indian economy has good fundamentals, low short term external debt, and sizeable foreign reserves. These should stand the country in good stead in the days to come. Reserve Bank is continuously maintaining a close vigil on the market developments, both domestically and internationally, and will take all necessary steps, including liquidity support (both dollar and INR), to ensure orderly conditions in financial markets.”
However, this time around, one cannot fathom which way the aftershocks will pan out post the Brexit. The ensuing months would certainly be a period of uncertainty in the equity and currency markets till clarity emerges on the final picture of UK-Europe relations emerge. That is already visible. Post the Brexit announcement, the total investor wealth plunged by nearly Rs 4 lakh crore from Rs 101.4 lakh crore at the end of yesterday’s trade on Indian bourses.
“The global market implications for this are very negative and volatility across all asset classes will be high for some time going forward. We could, therefore, re-visit the concerns of earlier this year that the global economy could now take a shift down and central banks have fired most of their ammunition and anyways it is not really working. So politics will be at the forefront of markets and with that huge volatility,” said Andrew Holland, CEO, Ambit Investment Advisors, on Friday.
The larger point here is this. In the backdrop of Brexit and uncertain global markets, the Modi government has an unenviable task of finding an RBI governor who the international markets would perceive as a credible face as someone who can offer clarity on the state of affairs in the Indian economy, not someone who would simply follow the government diktats. Of the names doing rounds for Rajan’s successors, Arvind Subramanian, currently being subjected to the Subramanian Swamy Raj, seems to be a good bet.
89 total views, 1 views today