Brexit to hurt exports, FDI, FII inflows, say experts

Sanjeev Sharma

Tribune News Service

New Delhi, June 27

The UK’s vote for Brexit will adversely affect India’s exports, FDI and FII inflows, currency as well as domestic liquidity, according to analysts.

According to a report by Ambit Capital, against the backdrop of the UK having voted to exit the EU, it will trigger four sets of direct adverse changes for India namely an adverse impact on India’s UK and EU-bound exports (as these regions deal with slower GDP growth), a slowdown in FDI and FII flows into India as globally business confidence is disturbed, pressure on the rupee and a pressure on domestic money market liquidity.

Since any region’s import demand is driven by its GDP growth, India’s exports to the UK and the EU are likely to be adversely impacted as EU accounts for 17% of India’s exports with the UK having a share of 3%.

The report said Brexit is likely to lower business and investor confidence levels around the world which will adversely impact FDI and FII flows into India.

Even as FII flows into India have abated over the past year, steady FDI flows has been a source of stability for India’s external accounts. Given that FDI flows are known to come under pressure when global risk-on events transpire, Brexit and the associated uncertainty seem likely to affect FDI flows into India.

The report adds that while the direct effects of Brexit on India appear worrisome but manageable, it is the second round impacts that could affect India more profoundly as China could seize this opportunity to decisively devalue its currency and Europe — already dealing with negative CPI inflation and negative interest rates — could also have to deal with a recession.

DBS Economics Global said in a note that Britain took a “great leap backward” when it voted to leave the EU. “But it won’t be the only country to shoot itself in the foot if governments don’t start dealing with the losers from free trade and globalisation more effectively than they have in recent years,” it said.

The report added that countries as a whole win big when they open their borders to trade, capital and labour flows. “But some lose in the process and it’s no surprise they want to build walls; to go back in time; to Brexit,” it said.

According to a report by Crisil Research, the rupee could see volatility in the coming weeks as global markets remain angsty.

The report said 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 un-hedged overseas borrowings. The report said that auto, IT, textiles, pharma, leather and metals are the most vulnerable sectors.