Brexit fallout and the Indian Foreign trade By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

July 26, 2016 | Posted by bobbysrinivasan << back to blog

The outcome of the referendum should be sending shivers to all those who have business relations with the Euro union. The Indian exports to the UK and EU amounts to 17% of the Indian total exports. Given that in the last 19 months our exports are falling steadily this political event will have a serious impact to our future external trade. The pound which was trading at 1.49 dollar to it has now dropped to 1.32 a whopping 15-20% decline in value. So the inflow of trade revenue from UK will be deeply affected by the fall in the British pound exchange rate.

Let us look at the global situation. The current economic scenario is somewhat scary to say the least. China has just announced that their latest quarterly GDP is around 6.7%, if the recovery does not take place in the near time. China may choose to devalue their currency. Chinese economy is driven heavily by net exports. The Chinese authorities continue to devalue their currency slowly but surely (Yuan is down 6% against the dollar in FY16).

Turning our attention to Europe, which is already affected by negative CPI inflation rate negative interest rates will now probably now have to contend with the prospect of a drop in business confidence which could push the European economy into a prolonged recession and thus destroy their enfeebled banks. Currently the Japanese economy is sharing the same tale of the Eurozone namely continued quantitative easing, negative interest rate and a moribund growth rate.

This leads us to the question of what is in store for India. Several possibilities exist such as Brexit could lead to some of the FII debt heading for the door. Next India faces a potential $ 25 billion in outflows when FCNR-B deposits raised in 2013 matures at a time when the rate of capital account surplus has been diminishing quarter after quarter. According to the real effective exchange rate calculation Indian rupee appears overvalued atleast by 5%. Indian foreign currency debt now stands above 500 billion US dollars. Given that our reserve stands at 360 billion. We will have approximately 72% coverage. This by itself is not a serious problem but given the global economic environment and external trade situation it doesn’t at all look positive.

So what can we expect in the near term? Possible devaluation of Chinese Yuan with the Rupee following it; possible outflow of FIIs money creating a serious liquidity shortage. A risky and unsettled stock market. To deal with this situation we need to have a RBI governor who can take independent and bold decision to shore up the Indian economy during this troubled times. We will have to see as to how this will all pan out. But one thing is certain; UK leaving the euro union is not going to be good for India. Let us hope for the best.

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