Britain's decision to opt out of the European Union-EU (Brexit) has rattled markets, currencies across the world. However, for India, its impact would be limited except for some sectors and financial markets, say research reports.
According to Standard Chartered Bank (StanChart), the immediate impact of the UK’s exit from the EU on India’s economy is likely to be felt via the financial-market and confidence channels. "However," it said, "India’s relatively strong fundamentals are likely to leave it less exposed than Asian peer economies. Comments from the Reserve Bank of India (RBI) and the government indicate that policy makers stand ready to act, if needed. The domestic orientation of India’s economy is likely to keep the need for monetary or fiscal support minimal, though these tools can be used if warranted."
Ratings agency CRISIL feels that Brexit has come at a time when the global economy is not in great shape and thus it (Brexit) has added to the weakness, fragility and uncertainty and roiled markets. "However, Britain’s exit from EU is likely to impact Indian companies in a multiple ways - demand weakness on account of potential slowdown in the EU and the UK, volatility in commodity prices, currency impact on account of the potential depreciation of the rupee, euro and the pound, and balance sheet impact on account of exposure to unhedged overseas borrowings. We see Auto, IT, textiles, pharma, leather and metals as the most vulnerable sectors," the ratings agency said in its research note.
Last week, the United Kingdom, one of the 28 countries of the EU decided through a referendum to exit from the Union.
StanChart feels the medium-to long-term impact of Brexit, via trade and direct investment flows, remains uncertain and it will depend on evolving scenarios. "Should the UK remain the only country to exit the EU, repercussions for India would likely be limited. The UK accounts for less than 5% of the country’s goods and services exports, inward remittances and annual foreign direct investment (FDI) flows. If the UK and India are able to negotiate a better trade pact, which experts believe is likely, India could eventually benefit," it said.
According to CRISIL, Indian companies are likely be impacted in multiple dimensions. This includes, demand weakness on account of potential slowdown in the EU and the UK; volatility in commodity prices; currency impact due to potential depreciation of the rupee, euro and the pound; translation losses for companies with significant operations in the UK and the EU and, balance sheet impact on account of exposure to unhedged overseas borrowings.
The ratings agency says, "Companies in sectors such as automobiles, auto components, information technology services, textiles, pharmaceuticals, gems and jewellery, leather, and leather products are most vulnerable to changes in demand and currency value. Metal companies would be hurt by the likely downward pressures on prices and potential slowdown in demand, at least in the near-term. Sectors such as shipping and ports that are reliant on global trade will also have to grapple with lower growth and consequently lower freight rates and utilisation. Further, companies with unhedged overseas borrowings will be affected by volatility or temporary sentiment-driven weakness in the rupee."
StanChart feels, due to the higher trade volume between India and EU compared with UK on a standalone basis, the EU matters more for India than the UK. "Given that India’s trade with the UK is small, any near-term negative impact is likely to be limited. Bigger risks arise from uncertainty around the EU’s future, as it is a more important trade partner for goods and services together than the UK. A slowdown in EU economic activity due to political uncertainty would likely hit Indian exports," it said.
Over the medium to long term, experts have opined that Brexit could benefit India, giving it the flexibility to negotiate its own free trade agreement (FTA) with the UK with less stringent regulations than current EU regulations. "While this possibility cannot be ruled out assuming no further regional spill over from Brexit, the timeframe required to reach such an agreement is uncertain," StanChart said, adding, "historically, FTAs have taken years to negotiate, creating long periods of uncertainty. For example, the trade agreement between India and South Korea took five years to negotiate and finalise. India has been negotiating an FTA with the EU since 2007. Even if the UK tried to expedite trade negotiations, given the challenging economic environment, FTA negotiations are likely to be a multi-year process."
According to CRISIL, due to Brexit, compliance and administration costs are likely to rise for Indian companies. "The impact of Brexit on global growth and trade in the long-term would depend on how negotiations between the UK and the rest of the EU-member countries pan out – something that is difficult to quantify at this juncture. Companies may also, over the long-term, have to grapple with increased administrative and compliance costs, as they may have to set up base in other countries also in the EU. Currently, most companies set up their European headquarters in the UK, and use London as their gateway to the European market," it added.
Given the uncertainty with the Brexit process, it should not be merely viewed as an event but as a process that will gradually unfold -- with intermittent mini-frights thrown in -- as negotiations proceed. We have already seen how capital flows affect the stock and currency markets. "The good thing is that over the medium term, subdued global outlook – more so in Europe after Brexit – could divert investments to India because of stable outlook and higher-growth prospects compared with other emerging markets. It is very likely that the world will once again be awash with stimuli-driven liquidity and monetary policies will remain accommodative for even longer than previously anticipated," CRISIL concluded.