Why India is poised to withstand Brexit

Why India is poised to withstand Brexit

24/06/2016 14:35

Even as a quick glance at the state of financial markets on Friday may suggest doom and gloom for global stocks, currencies and commodities amidst Britain’s shocking verdict to leave the EU, Asia’s third biggest economy is poised to overcome this initial knee-jerk reaction, analysts opined.

Taking cues from its global counterparts, investors at Dalal Street seemed panic-stricken as the Sensex plunged by over 1,000 points but pared some losses in noon trade. Similarly, the rupee which sank to a four-month low of below 68 per dollar, cut losses to trade at 67.84 per dollar amid reports of RBI selling dollars to rein in the volatility.

Central banks across the globe have warned that Brexit may result in slower global growth, which could cut demand for commodities such as oil, benefiting India, a net crude importer. Crude oil was down over 5 per cent in the international market on Friday to USD 47 per barrel mark. It’s worth noting that every USD 1 dollar drop in crude oil prices leads to roughly savings of USD 1 billion in India’s oil import bill, helping narrow trade and current account deficits, and keep a lid on inflation, offering more room for monetary accommodation.

While the rupee may suffer some short-term volatility, the local currency is seen to be more stable than its emerging market peers. Further, India’s hefty forex reserves kitty of a record more than USD 360 billion will ensure that India has plenty of ammunition to overcome any swings in foreign capital flows.

Thanks to its strong macroeconomic fundamentals including a robust consumer-driven growth model, India, today, is ranked as one of the most attractive foreign investment destinations. In 2015, India received the highest FDI flows globally, surpassing the likes of China and the US, as the Modi government moved to ease FDI policy in several sectors.

The above factors will continue to ensure that strong fund inflows from abroad will keep coming to India and Brexit may not be all that bad news for India.

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