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Brexit – Boon or Bane for India!

G+ Profile |
Category:  General Economic  
| 17-06-2016 03:17 PM

Brexit - Boon or Bane

On the 23rd of June 2016 the people of Britain will vote to stay in the 28-nation European Union (EU) or to exit from EU, the latter is being termed as Brexit. From Britain’s perspective, it’s a huge dilemma. On one side, in the event of Brexit the country can exercise its independence in decisions of economic and strategic significance without having to worry about the fallouts on other members and other EU constraints. On the flip side, in one stroke the country will lose the common market and luxury of backing of all the members in economic and other strategic matters. Italy used EU to coerce India on marine issue.

Why should India be bothered about an internal event of the European Union?

European Union is economic and political union of 28 countries having a common single market and allows free movement of people, goods, services and capital between member states. In case the referendum ends in ‘leave’ vote:

1. Many other countries may follow suit.

2. Countries using Britain or UK as EU gateway for doing business will be suffered.

3. Global currency markets will be shaken as Pound and Euro will be affected adversely owing to preference to safer bets like USD and Gold.

4. It is estimated that GDP of many countries including UK and Germany will be hit as EU export import dynamics will change.

5. Over 800 Indian companies having businesses in UK including Tata Steel & Tata Motors will suffer.

6. UK is among the top FDI contributor for India and the contribution may go down owing to their own economic problems. 

Due to the factors listed above, the equity investors world over will sell riskier equity assets from emerging markets and park their money in cash or other safer heavens. India too will suffer an exodus till haziness of actual impact is over. However, experts are confident that India’s relative attractiveness will mitigate the length and extent of overall impact on Indian equity markets.

On the flip side, the Brexit may allow UK to independently enter into trade agreements with India without EU constraints. UK may consider India much more favorably considering increasing economic clout of India owing to ‘fastest rising large economy’ status.

In nutshell, the Brexit will cause tremors worldwide including India, although for India the intensity will be relatively low and damage would be temporary.

Sunil Patni, CFA
Financial Research| Business Analysis| Product Development