Uncertainty of any sort results in volatility and Brexit will be no

exception. As risk aversion sets in, there would be a decline in financial

markets and India would see this impact along with other nations.
Arundhati Bhattacharya, SBI Chairman
Should Brexit be a concern for India? It is easy to think of apocalyptic
scenarios, as the Britains 52% population has voted for an exit from the
European Union (EU). Brexit could just be the beginning of the end for
Europe, as George Soros has said.
The overall impact in real terms is likely to be broadly muted as the
flows of trade and investment would likely continue in the regular course.
Three potential casualties, if a Brexit were to happen, could be a)
manufacturing companies that have set up base in the UK while having a
substantial exposure to mainland Europe, b) firms in the services sector,
especially information technology firms and c) the more pullouts i.e.
Britains leaving the Union could have a cascading effect.
According to a Bank of America Merrill Lynch analysis, a Brexit may create
recession risks that could dent IT demand further, hurting the 10-14%
revenue growth forecast for the UK businesses of the Indian IT companies
in FY 17. Worse is the fact that the five large Indian IT companies have an
8-15% revenue exposure to the British Pound, the bulk of which is
unhedged.
There is also the potential currency impact, with a fall in the Euro likely to
have a cascade impact on currencies such as the Chinese Renminbi, which
could potentially appreciate and force an intervention by authorities in
China, something that could trigger an adjustment in the broader currency
markets. While the Rupee has the Dollar as the primary anchor, some
element of volatility in these markets can be expected.
India will also feel the heat through heightened volatility in the global
financial markets.
From a companies perspective, if the Brexit vote goes through, Indian
businesses that are focused on purely tapping the UKs domestic markets
are unlikely to face many challenges. But those intending to leverage the
UK as a base to gain access into European markets might have to rethink
plans. A looming risk is that of an imposition of trade barriers, scrapping of
preferential rates, and higher taxes between the UK and rest of the EU,
which might pose a hurdle for foreign companies to invest in the UK.

The majority of Indian businesses choose to locate their European offices

in the UK in order to benefit from the ease of operating in the UK while
accruing the advantages of seamless access to the wider EU. Removal of
this gateway would be a serious concern for Indian businesses
headquartered in the UK, who might now have to relocate and direct
investment to Europe, and comply with two different sets of laws.

In terms of bilateral trade with the UK, India invests more in the UK than in
the rest of Europe combined, and the UK is the third-largest FDI investor in
India (after Mauritius and Singapore). The flows in both directions could be
impacted as a high degree of uncertainty threatens the UKs investment
outlook and terms of trade.
Nobody knows how it will all pan out. But some things are certain: a) The
risks have increased; b) The outlook for global growth has gotten worse; c)
with interest rates at rock bottom, some of them even negative, there is a
limit to how much further stimulus central banks in developed markets
can give their economies; and d) as Reserve Bank of India (RBI) governor
Raghuram Rajan warned long ago, We are in the midst of an age of
competitive devaluation and beggar-thy-neighbour policy. When elephants
fight, the grass suffers.