An ill wind

The Indian financial markets have weathered the fallout of the Brexit referendum rather well. The 2.2 per cent correction in India’s stock indices on Friday was modest, on a day when major European and Japanese indices crashed 7-10 per cent and the US markets lost 3-4 per cent. Domestic bond yields have also held steady and Indian stocks have been quick to regroup, along with other Asian peers, since Monday. The rupee weakened by just 1.4 per cent against the dollar, compared to the 11 per cent slide in the pound, the 4 per cent depreciation in the euro, and the 2 per cent dip in the Chinese yuan. This relative resilience of Indian markets to global turbulence is a break from the past, as any episode of risk aversion has earlier had foreign investors stampeding for the exit door. While it isn’t right to conclude that Indian markets are out of the woods yet, there are sound fundamental reasons for long-term foreign investors to think twice before exiting India in a hurry, this time around.

From an equity investor’s point of view, renewed downgrades in global growth forecasts (Brexit is expected to cut EU growth by 0.5 percentage points) actually make India’s prospects appear in better light. Quite apart from the 7.6 per cent GDP growth, a stable political regime and well-contained twin deficits offer strong arguments for portfolio investors to bet on the country, once the dust settles. For India Inc — which is a large net importer of materials — a weakening of global oil and commodity prices is good news. This can unleash further raw material and fuel savings that can aid the earnings recovery evident in the recent March quarter results. Yes, select companies from sectors such as auto components, garment exporters and IT who rely on the UK or the EU for revenues will face headwinds from business uncertainties. But as a majority of listed firms are domestically focussed, a good monsoon and rising government spending may cushion the Brexit impact on India Inc’s profit growth. From the bond investors’ perspective, the widening differential between Indian and global bond yields may offer a compelling reason to bet on domestic g-secs. Liquidity factors may favour bright spots such as India too. Post-Brexit, global central banks have reason to continue with extremely accommodative monetary policies in a bid to stave off a liquidity freeze and stimulate their faltering economies.

While these factors are positive from a medium-term perspective, it would not pay for policymakers to be complacent. Foreign fund flows both into the stock and bond markets are heavily reliant on the exchange rate. While prompt intervention may have helped the currency weather the last few sessions, the Reserve Bank of India cannot fritter away all its firepower given imminent outflows of over $20 billion on account of maturing FCNR deposits. Post-Brexit, it’s up to the Centre to sustain the momentum in growth and foreign investment.

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