… India must brace for change

WITH Britain’s ‘Leave’ European Union vote, global financial markets got a nasty jolt, reviving bad memories of the Lehman moment. Its ramifications could be more complicated and even worse. The impact on India will be relatively limited largely because of our domestic-focused economy. The Britain and EU-centric export-led economies will feel the real heat. 

The reassuring words from Finance Minister Jaitley and RBI Governor Raghuram Rajan about India’s good fundamentals, low short-term external debt, and sizeable foreign reserves did soften the initial blow but long-term concerns remain. Remember after the Lehman collapse, capital outflows continued for five long years. The business sentiment here was just beginning to improve, economic growth was picking up and the government too opened up various sectors of the economy to woo foreign investment. All this would be in danger until stability returns. India’s exports, already shrinking, will suffer further. The $8.83 billion trade with Britain will be in jeopardy as also the auto and pharmaceutical exports to Europe. Foreign funding expected to pour in infrastructure, defence, civil aviation, real estate and other areas may get delayed or shelved.

In turbulent times fund managers look for safe havens like the dollar and gold, which appreciated significantly on the very day the news of divorce came. But the other infected assets — stocks, currencies, commodities — could fall further, impacting the performance of economies and companies. A cheaper pound will make trips, holidays and education in Britain cheaper for Indians. A fall in oil prices is expected and it will benefit India. Low commodity prices, however, can also hit corporate performance and poor corporate earnings would derail the plans on managing bad loans of public sector banks and trigger capital outflows, weakening the rupee. How effectively the RBI handles the situation, how monetary policy is shaped and whether the new RBI Governor generates Rajan-like confidence in investors will decide the fate of India’s financial markets, businesses and economy.