It’s a Black Friday for markets across the world

Currency and stock markets across the world woke up to a day of shock and uncertainty as voters in the UK decided to leave the European Union. In India, benchmark indices fell by over three per cent intraday before recovering in the afternoon while the rupee took a thrashing as well.

India, in fact, held firm as Asian peers tumbled all around. Indices in Japan lost over seven per cent in Friday’s trade, while Hong Kong and South Korea lost nearly three per cent. In Europe, while the FTSE 100 contained losses at a 2.56 per cent fall, the CAC 40 in France lost nearly seven per cent while DAX in Germany fell 5.91 per cent.

In India, the Sensex plunged by 604.51 points at at 26,397.71, 2.24 per cent lower than Thursday’s close, while the Nifty ended the day at 8,088.60, down 181.85 points. The rupee closed 71 paise weaker at 67.96 to the dollar over the previous close. It opened at 63 paise over the previous close of 67.25, and as news of the “Brexit” roiled the forex market, it hit a low of 68.2150 per dollar.

India Ratings, the domestic subsidiary of Fitch Ratings, said in a report that “Domestically, the ensuing global volatility could put the both currency and debt markets on tenterhooks, but the markets will await clarity from global central banks as they tackle this unprecedented event.

“The markets are likely to be gripped with two major concerns hereon,” it added.

“One, the instability that the euro area will face as other nations contemplate their membership in the EU and two, the response of global central banks, especially the US Federal Reserve’s stance on policy rates.”

Arvind Chari, Head – Fixed Income and Alternatives, Quantum Advisors, said that following Brexit, “The pound will have to depreciate. It has already fallen eight per cent through the day, and it can fall more…Until there is clarity on the terms of exit, the GBP will depreciate to boost exports, lower its imports and draw in capital flows.”

Yuan devaluation on cards The biggest ensuing risk, he adds, is that of a yuan devaluation by China. “The fall out risk of that is other currencies will also depreciate or might follow suit. And the biggest risk here is China. Depreciation in GBP and EU can force China into another round of devaluation. When they did that in August last year, there was a short term ‘risk-off’ event in the global financial markets. Global bond yields will fall as safe haven trades and the Federal Reserve is unlikely to hike interest rates, in fact, it might even begin a new round of quantitative easing if conditions worsen.”

The domestic markets were volatile with the India VIX index rising 3.37 per cent to 18.6275. The Bank Nifty fell lost 2.61 per cent while auto, IT and metal stocks lost value across the board. Foreign investors sold net equity of ₹629.14 crore while domestic institutions bought ₹114.94 crore (net). Retail investors were net buyers as well, picking up ₹117.74 crore of equity at the end of the day.

Currency front On the currency front, exporters found the 68.20 level attractive and started selling dollars. Banks too sold dollars, apparently at the central bank’s behest, at this level. Intraday, the rupee hit a high of 67.7850. In a conference call with the media, Raghuram Rajan, Governor, Reserve Bank of India, said “the RBI is watching the various markets and obviously there will be some volatility as a result of this decision in the UK.

“But we are looking at markets and ready to intervene if we see that they become disorderly but we are not going to prevent any market adjustment. But we are ready with ammunition, if necessary.”

In an emailed statement, Arundhati Bhattacharya, Chairman, SBI, said, “Uncertainty of any sort results in volatility and Brexit will be no exception. As risk aversion sets in, there would be a decline in financial markets and India would see this impact along with other nations. However, as trade strategies are reworked there could be potential advantages in the form of better market access for India to EU and UK.”

Experts are telling investors in India to keep calm and latch on to more equity. Rajiv Shastri, MD and CEO, Peerless Funds Management Company, said: “To our minds, the reaction in the global markets to the UK Referendum is an exaggerated one. Any reaction of this sort presents a buying opportunity. This is especially true for India, since almost every factual development after the vote presents a benefit, whether it's lower oil prices or a slower increase in US interest rates.

“On the other hand, all the perceived negatives are merely speculation. As always, facts need to be trusted more.”

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