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The United Kingdom voted to exit the European Union on June 23. The first fallout has been Prime Minister David Cameron's decision to step down by October this year. A look at what is in store for Indian investors.
The United Kingdom voted to exit the European Union on June 23. Over the past two days, benchmark indices gained ground ahead of the vote as opinion polls indicated that Britain would choose to remain in the EU.
However, the Friday morning development turned out to be a surprise package. Benchmark indices tumbled across Asia. From Australia to India, share prices fell anywhere between 3% and 8%. Currencies took a hit too.
The Indian rupee fell sharply against the U.S. dollar as the British pound tumbled 10%. Indian investors have witnessed market value to the tune of Rs 4,00,000 crore wiped off.
Here are pointers that explain the development if you are an Indian stock market investor:
What changes: Nothing immediately. The exit process would take two years after the British Parliament approves the referendum and applies to EU for it. Indian businesses will begin to assess the impact of changes as they affect their operation in Britain.
Companies like Tata Motors and Tata Steel that have a significant UK exposure would be watched closely as they face uncertainty. Shares of Tata Steel and Tata Motors fell over 10% as investors do not like uncertainty. Other Indian businesses face an indirect impact that may or may not affect profitability.
Market impact: If you are an Indian investor, you should be happy if you were sitting on the sidelines for the market to correct. Share prices follow the growth in profits of companies. Companies selling goods and services in India will not be affected.
However, businesses looking to grow in Europe and UK will face uncertainty. There are an estimated 800 Indian companies operating in the UK. But no analyst has flagged any major impact on future profits of listed Indian companies.
Indian rupee: The rupee fell over 1% on Friday and may see volatility along many other emerging market currencies. Currencies with a poor current account deficit where they owe more money in foreign exchange would be hit significantly.
Those countries dependent on commodity exports and high trade with UK like South Africa, Turkey would suffer even more, according to Morgan Stanley estimates. The American bank does not expect a significant adverse reaction on the Indian rupee. Many analysts endorse that view.
Indian government in action: The economic affairs secretary Shaktikanta Das was immediately seen on television calming nerves. He highlighted that India had no reasons to worry and termed stock market reactions as temporary.
India’s current account deficit, that determines the foreign money the country owes, is at a record low. Since the demand for foreign exchange is low, there is no reason for the rupee to continue to fall. He also highlighted that government finances are strong.
The only challenge for the government is inflation. Many analysts believe that retail inflation may continue to stay high. This could mean that interest rates will not go down.
Foreigners will sell: Foreign institutional investors are likely to buy gold or US dollar-denominated assets during this time of uncertainty. While they may not aggressively pull out from Indian shares, they may not bring any new money to Indian markets either for some time.
FIIs own almost half of the non-promoter shares listed on Indian stock exchanges. As uncertainty prevails, selling may continue. Domestic investors may look at this as an opportunity to pick up frontline shares at low prices.