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The shock of Brexit verdict pushed financial markets into a freefall. The announcement sent the British pound to its lowest levels since 1985. Commodity markets also went into a tailspin. And yet, the bloodbath may not be finished. There is fear and uncertainty about the long-term consequences of Britain's exit from the euro zone on the rest of the world. This makes us think how Brexit will impact India?
In our view, India may have more reasons to smile than to be concerned about.
The first and foremost benefit will come from a drop in crude prices. An article in The Economic Times suggests that the slowdown that Brexit will trigger in several economies globally will lead to a fall in the prices of commodities like crude oil. This in turn will help India save a lot on its import bill. One must note that every US$ 1 drop in crude prices per barrel leads to roughly US$ 1 billion savings in India's oil import bill. The net impact of this would be a reduction in India's current account deficit (CAD).
Secondly, Brexit would help India in its fight against inflation. This is because a drop in commodity prices would reduce imported inflation. India has seen a spike in its Consumer Price Inflation (CPI) for two consecutive months. And a major factor fueling this inflation was the rise in international commodity prices.
Further, a check on inflation levels would allow the central bank in cutting interest rates. This would further mean a revival in corporate lending, investment and an overall growth of the economy.
As for the rupee, Brexit may spell some trouble. The surge in safe haven US dollar post Brexit has weighed on the rupee. However, India looks well placed on this front too. This can be said as the RBI is well-prepared to deal with any unusual volatility in the currency markets. Further, as Raghuram Rajan noted, the rupee has been more stable compared with other emerging market currencies.
So even though India will be impacted by the global slowdown, it will still be much better off.
As for investors too, Brexit and its effects in the coming months could be a positive if one knows how to channel his greed and fear right. Whenever markets suffer panic attacks and fear-driven sell-offs, long-term value investors will have the rare opportunity to pick solid stocks at big discounts.
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