Brexit impact: Indian rupee weakening a major concern as markets crash

Image: Danish Siddiqui / Reuters

Indian stock markets and the currency cracked under pressure in early Friday trade

Indian stock markets and the currency cracked under pressure in early Friday trade, in line with global markets, as votes in Thursday’s UK referendum confirmed that Britain will leave the European Union. This news triggered an avalanche of selling across major markets and most major currencies slid to the dollar, on fears of prolonged uncertainty in global business and investment sentiment in the UK and some European economies. Internationally, prices of oil tumbled, but gold rose sharply.

The benchmark 30-share BSE Sensex plunged 604.51 points or 2.24 percent to 26397.71 and the 50-share NSE Nifty slipped 181.85 points or 2.20 percent to end at 8088.60.

The Indian rupee fell to 68.14 against the dollar, its lowest level since February this year, but clawed back to 67.79 in afternoon trade.

As stocks and currencies crashed, India’s finance ministry officials sought to allay investor concerns of the impact of “Brexit” on the Indian economy. “India has the firepower to withstand Britain's likely exit from the European Union, (we) will accelerate growth programmes to offset its impact, Economic Affairs Secretary Shaktikanta Das told media in New Delhi.

"India is prepared for all eventualities," he added.

India is amongst the better performing major global economies, with GDP growth of 7.6 percent for FY2016, narrowing current and fiscal deficits and weakening inflation.

Bankers, investment managers and financial services experts Forbes India spoke to, say the Indian rupee will be under “considerable pressure” to the dollar and cite it as a major concern in coming months. Despite Friday’s rapid decline in stock prices – where automobile, IT and banking stocks fell the hardest – experts feel that this reaction might have been overplayed.

But ”Brexit” cannot be seen as an isolated event which is complete, they said. Issues relating to trade barriers, jobs, immigration and financial investments into businesses, will become contentious issues which UK and several European governments will need to tackle in coming months.

Jigar Shah, CEO of Maybank Kim Eng Securities India, says:  “The India market reaction is the same as that of global markets. But there is more to play out…there will be more to sink in. Today the impact has not ended. How much time this takes, like issues relating to trade barriers etc., is difficult to say.”

But Shah said that India may not be impacted in a major way. “Our co-relation to the region is small. If factors like a normal monsoon 9shich is on track), the Goods and Services tax and better corporate earnings play out in coming months,  India should be better placed.”

Saurabh Mukerjea of Ambit Capital expressed concerns of the fresh weakening in India’s currency. “I feel that the stocks reaction has been overplayed. I really am more concerned about the rupee. The dollar is likely to punch out every currency and India and China could be big losers here,” says Saurabh Mukherjea, CEO, Institutional Equities with Ambit Capital.

“Global financial flows will get disrupted, global business, investor confidence will be hurt. But the core of Indian economy remains unchanged,” Mukherjea said.

Ajay Srinivasan, chief executive (financial services) at the Aditya Birla Group said: “This (Brexit) is not good for Britain or the EU. This is a trade-off between emotions and economics.” But Srinivasan, like Mukerjea, was confident that India’s growth story from a consumption perspective is very much intact.

As seen with most global socio-economic events, export dependent economies are likely to be hit the most. “This would include the Far East like Japan, South Korea, Taiwan etc whose GDP is primarily export dependent will be hit hard due to global trade getting impacted as a result of this uncertainty,” said Ajay Bodke, CEO and Chief Portfolio Manager (PMS), at brokerage Prabhudas Lilladher Pvt ltd.

Commodity-exporters like Brazil, South Africa, Russia, Nigeria, Gulf countries (like Saudi Arabia, UAE, Kuwait etc) etc will suffer due to fall in their major export commodity basket, Bodke added.

A Nomura global research report is forecasting a globally co-coordinated central bank reaction to the global meltdown, such as liquidity support through forex swap arrangements and possible forex intervention. Between now and the year-end, Nomura analysts expect central banks in India, Korea, Indonesia, Taiwan, Thailand and Malaysia to start easing rates between 25 to 50 basis points.

Experts outline a scary picture globally. Singapore-based DBS Bank’s Chief investment officer Lim Say Boon, said: “Britain’s shock departure from the EU has created conditions for a perfect storm in global risk assets. “Brexit” will add a new – and very threatening – dimension.“

“The UK faces a decline in economic activity as a result of its loss of previous trading privileges within the EU. The EU faces the threat of contagion and further stresses on the unity of the Union. And an aggravated “risk-off” will threaten the value of bank assets, potentially putting at risk bank capital.”