How Brexit will affect India

Zee Media Bureau/Ajeet Kumar

Market benchmark Sensex tanked over 1,000 points on Friday as UK's vote to exit European Union sent financial markets into a tailspin, eroding nearly Rs 4 lakh crore from the investors' wealth held in stocks.

Rupee also fell past 68 Vs US dollar, though the government and RBI sought to play a brave face saying the fall in Indian currency was relatively moderate in comparison to many other currencies globally.

Meanwhile, domestic investors are concerned about the direct negative impact that some of the India-based companies and sectors that have investments and exposure to Britain will suffer.

According to Jimeet Modi, CEO, SAMCO securities, after some stability that will come in next week, investors should lap up good quality stocks which will be available at good prices.

"IT & other companies which have significant revenues from Europe and UK will be affected and may be avoided as the extent to which the Pound will be impacted will be unknown. Focusing on Indian consumer goods like ITC, HUL and Asian Paints, BFSI stocks like HDFC Bank, Kotak Bank and Bajaj Finserv can lead to good returns for investors,” he said.

However, we saw a steep fall in the indices, the trajectory of Indian markets remains upwards, he added.

Indian IT companies get anywhere from 6-18 percent of their revenues from the UK. The UK has traditionally been the gateway for Indian IT firms to enter Europe and they have set up a large presence in the UK to serve the EU markets from their headquarters in London.

"Consequently, a negative implication of Brexit is that Indian IT companies may need to establish separate headquarters/operations for EU, leading to disinvestment from the UK and diversion of activity from the UK to EU," Nasscom said.

Also, the immediate fallout of Brexit on the IT industry in India would be the impact of the decline in the value of the British pound, which would render many existing contracts losing propositions unless they are re-negotiated.

However, in the longer run, Brexit could help strengthen India-UK economic relationship as the UK seeks to compensate for loss of preferential access to EU markets.

"India's focus on innovation, entrepreneurship and high-end work renders it a very attractive destination from a talent standpoint and equally in terms of market access. This could work to the benefit of the IT sector in India since the UK currently accounts for about 17 percent of India's IT exports worldwide," it said.

Tata Motors-owned Jaguar Land Rover (JLR) has reportedly predicted an estimated 1 billion pounds loss by 2020 post Britain's exit from the European Union (EU).

Europe represented 24 percent of the total sales of 521,571 vehicles, making it the single biggest market for the company, ahead of the UK at 20 percent.

The British exit will also lead to greater investments into less risky assets like gold and increase the overall outflows from the domestic equity markets.

Meanwhile, gold rallied the most since the 2008 global financial crisis today as Britain`s vote to leave the European Union, forcing a sell-off in risky assets and a rush to safe havens.

At domestic front, gold prices breached the Rs 32,000 per 10 gram mark by climbing over Rs 2,000 per 10 grams.

India invests more in the UK than in the rest of Europe combined, emerging as the UK's third largest FDI investor. Access to European markets is therefore a key driver for Indian companies coming to the UK, as per CII.

Anything that lessens this attractiveness may have a bearing on future investment decisions. It is important also to ensure continued border-free access to the rest of Europe for the many hundreds of existing Indian firms that have base in the UK, CII report added.

Britain ranks 12th in terms of India's bilateral trade with individual countries. It is also among just seven in 25 top countries with which India enjoys a trade surplus.

As per data with the Commerce and Industry Ministry, India's bilateral trade with Britain was worth USD 14.02 billion in 2015-16, out of which USD 8.83 billion was in exports and USD 5.19 was in imports. The trade balance thus was a positive USD 3,64 billion.

This apart, the country brief of India's Ministry of External Affairs says Britain is also the third largest investor in India after Mauritius and Singapore, with a cumulative inward flow of USD 22.56 billion between April 2000 and September 2015.

An exit of Britain from the European Union, will create a lot of uncertainty within Europe, but can open up opportunities for India, says an SBI research report.

Brexit may actually strengthen India's position as a truncated EU may have to rework its negotiation strategy in order to gain market access.

From an India point of view, it is also necessary to appreciate that post Brexit, it is unlikely that UK financial market and its financial expertise will evaporate overnight.

According to SBI, there is one visible fallout of this referendum -- it does put a question mark on the future of Indo-EU Free Trade Agreement.