Britain’s exit from the European Union will mark a phase of uncertainty for the $108-billion Indian Information Technology (IT) sector in the near-term, industry body Nasscom said on Friday. Formed in 1973, the European Union is an economic and political partnership that allows member countries to operate as a common market with largely standard trade regulations. The British pound has plummeted by the most ever in a single day, about 8 percent, to its weakest level in three decades, and that will make USA products substantially more expensive in the United Kingdom.
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In order to allay fears among investors, both Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan assured that there was no cause for panic as India’s economic fundamentals remained strong along with other macro indicators. Our aim will be to smooth this volatility, minimize its impact on economy in short term.
There are concerns of Brexit having an impact on the IT sector in the long-term. Indian equities could do well compared to other emerging markets owing to favourable domestic macroeconomic factors and low crude oil prices.
The U.S.is the largest single investor in Britain, with $588 billion invested and $56 billion in exports to Britain past year. “India’s current account is also now nearly neutral”.
On the global front, euro fell against the dollar after the United Kingdom finally voted to move out of the European Union with Brexit officially declared.
Trading in U.S. index futures indicated a sharp setback for USA stocks at the opening bell after Britain voted to leave the European Union in a historic referendum. A gauge of the rupee’s one-month implied volatility jumped 20 basis points to 7.02 percent, data compiled by Bloomberg show.
“As far the as the stock markets are concerned it is initial spontaneous kind of sudden reaction because something which is happening goes beyond their expectation”. On the news of the final Brexit result, the British Pound slumped 8% to the Indian rupee in a single trading session, closing the day with 1 pound at 91.36 rupees.
In times of uncertainty, investors demand a higher “risk premium” for lending their money, ASB economist Nick Tuffley said.
“The Reserve Bank of India is maintaining a close vigil on developments” related to the Brexit referendum and “will take all necessary steps, including liquidity support, to ensure orderly conditions in financial markets”, the central bank said in a June 22 statement.
“However, with risk rising in the global financial market foreign capital will flow out putting pressure on rupee to depreciate and making Indian financial market volatile. If Britain gets the same treatment in terms of Free Tariff and Free Movement of persons, not much will change for India”.
Tata Motors fell by 3.07 pc.
It is one of the UK’s largest exporters and generates over 80 pc of its revenue from exports.
The rupee fell against the Japanese yen to 66.26 per 100 yen from 63.61.
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Back home, major Information Technology companies like Infosys and Tata Consultancy Services also face risks due to their dependence on Europe for technology exports. The stock ended down 1.3%. The buyback price is nearly 20% above its current market price.
