An historic vote for Britain to exit the European Union caused the tectonic plates of the European political and financial systems to shift, setting off sharp tremors around the world’s financial markets, including in India, on Friday.
The ‘Brexit’ vote, which blind-sided most market analysts and pollsters, sent stock markets from Tokyo all the way around the world to Wall Street plunging; currency markets too were in turmoil, with the pound sterling collapsing to a 30-year low against the US dollar.
India was not immune to the shock: the Sensex tanked by over 1,000 points in early trade and the rupee touched a low of 68.22 against the dollar. They subsequently recovered, with the Sensex closing 604 points down and the rupee closing at 67.96.
Jaitley, who is on an official tour to China, issued a statement to say that India was prepared to deal with the short- and medium-term consequences of Brexit and continues to be a good option for investors.
Volatility and uncertainty, Jaitley added, are the new norms in the globalised world, and all countries have to brace themselves for turbulence arising from the referendum’s medium-term impact.
“Our aim will be to smooth this volatility and minimise its impact on the economy in the short term,” he said. “At the same time, for the medium term, we will steadfastly pursue our ambitious reform agenda… that will help us realise our medium-term growth potential of 8-9 per cent.”
RBI goes fire-fighting Economic Affairs Secretary Shaktikanta Das said the government and the Reserve Bank of India (RBI) have been working on possible eventualities in recent weeks, and had sufficient “firepower”, including comfortable forex reserves.
The RBI intervened in the currency markets on Friday to check the rupee’s fall, Minister of State for Finance Jayant Sinha disclosed. Data on the precise size of the intervention was still being collated, he said.
Describing the Brexit vote as a “shock,” RBI Governor Raghuram Rajan, who is in Switzerland, told a TV channel that it perhaps reflected the mood of the people who are “tired of globalisation, tired of engaging with the world and tired of immigrants”.
Such a mood could impact attitudes towards free trade and free movement of people, which had built prosperity since the post-War years, he added.
Hopefully, “saner minds” will prevail, and people elsewhere will see the costs of leaving and cause “fissiparious tendencies” to be diminished, Rajan said.
Limited impact on India Brexit has, of course, induced a huge element of uncertainty to economies and the markets. It will also have geopolitical repercussions, beginning with a possible unravelling of the UK, and a further attenuation of the EU (See graphic).
However, the consensus among economists and top policymakers is that the direct impact of Brexit on India would be limited to the trade channel. However, lower inflows into emerging markets may result in muted inflows into India as well, they said.
India may also have to make small changes in its diplomatic dealings with Britain following the exit vote. However, there won’t be a significant shift in its overall policy as bilateral ties are strong; trade and investment flows too will largely remain unaffected, government officials said.
New Delhi will have to reframe its strategy towards the EU based on how Union reacts to the Brexit development, they added.
India and the EU are working on a free trade pact, and, with the exit of Britain, New Delhi needs to see if there is a change in the bloc’s negotiation strategy, they said. VS Parthasarathy, Chief Financial Officer, Mahindra Group, said the short-term uncertainty triggered by the vote would moderate over time; in fact, Brexit will throw up many opportunities, he added.