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Don't panic! 5 reasons why India stands immune to Brexit

"Investors should not believe if anybody says 'sell everything' in the market, because if everybody sells in the market, the equity values would become zero. Such episodes do not happen even during war times."

Aprajita Sharma June 24, 2016 | Updated 15:51 IST
Don't panic! 5 reasons why India stands immune to Brexit
Photo: Reuters

A sea of red swamped the shores of market across the globe after, in a historic referendum, Britain voted to leave the European Union, a severe blow to the European integration since World War Two.

While Britain's exit (Brexit) from EU may spell dire concequences for the UK and EU, those in India shouldn't panic. As the 'rockstar' of Dalal Street, RBI governor Raghuram Rajan himself said, "sun has not fallen from the sky".

"Fundamentally, India has nothing to do with Brexit. The country is relatively immune, considering very less dependence on UK as a foreign investor," said brokerage IIFL in a research note.

The benchmark index Sensex may have fallen over 1000 points on Brexit jitters, G Chokkalingam, founder, Equinomics Research and Advisory believes the Indian equity market is overreacting to this development.

"It is not a natural calamity or militancy attack to stop businesses and industrial production in Europe. In two weeks, market will start ignoring Brexit and the focus will shift to monsoon performance and corporate earnings," told Chokkalingam to Business Today online.

The expert also advised the investors to not believe if anybody says 'sell everything' in the market, because if everybody sells in the market, the equity values would become zero. Such episodes do not happen even during war times.

Below are five reasons why India stands immune to Brexit:

1) Ours is a domestic consumption story

Ajay Bodke, CEO & Chief Portfolio Manager - PMS, Prabhudas Lilladher said investors should realize that nearly 65-70 per cent of Indian GDP is domestic consumption. India is primarily a domestic-focused and domestic demand-led economy.

2) India's FII exposure to Europe not significant

Entire Europe accounts for just about 8 per cent of India's total FDI inflows, and Europe's share in India's FII inflows is also in single digit, said Equinomics Research and Advisory.

"Export to entire Europe is less than 15 per cent of total exports. On such a low base of India's exports, even if there is an absolute fall of 10 per cent in exports to Europe, it wouldn't impact much our overall exports," added Equinomics.

3) Oil slump to aid trade deficit & CAD

Oil prices slumped by more than 6 per cent after Brexit. The fall in the oil prices would lead to large savings in import bill because every $1 drop in crude prices leads to roughly $1 billion savings in India's oil import bill.

This would reduce India's trade & current account deficit (CAD) and counter any negative impact due to foreign capital outflow that may happen as part of movement towards safe haven assets.

4) Strong forex reserves to cushion India's external economy
 
With record foreign exchange reserves of $340 billion and expected forex outflows in September 2016 on the FCNR (B) front already covered, RBI is likely to intervene to stamp out any unusual volatility in the currency markets.

5) Imported inflation to fall
 
Lower commodity prices would dampen 'imported' inflation and help the RBI in pursuance of its stance of monetary accommodation.

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