Brexit means BRitain’s EXIT from the European Union (EU). EU is an economic and political partnership involving 28 European countries. It has grown to become a “single market” making goods and people to move within EU very easy.
The objective of Brexit was to restrict aid going out of UK to other EU countries as well as to restrict free transfer of people from other EU countries. After Brexit, Britain will be separated from the EU and would enter into trade and other agreement with EU just like any other non-EU country. Also, all other countries would have to enter into agreement with EU and UK separately for trading and/or other purposes.
Effect of Brexit
UK would be the most affected country as a result of the Brexit. The countries in the EU would be affected second most. As UK is an important trade partner of India, as a lot of UK based NRIs invest in India and as the world is becoming flat due to globalization, Brexit would also affect India.
Effect of Brexit on NRI’s Investments in India:
NRIs mainly invest in any of 5 investments: Bank deposits, Debt market, Equity market, Real estate or Gold. In addition effect on Forex conversion rate also affect NRI’s return. Effect on all these investments and Forex are analyzed below.
1. Bank FD or Debt Market:
I do not see any effect on Bank FD rates or India’s interest rate as a result of Brexit. However, combining Brexit, Raghuram Rajan’s exit as RBI Governor and expected outflow of about $20 billion from Sept-Dec 2016 as a repayment of FCNR FDs may increase the interest rates later in 2016. If next 6 months are passed without major bumps, I expect interest rates to stay in the current range or go down.
2. Equity market:
The effect of Brexit on Indian Equity market would be temporary. As Brexit was not expected, the equity market would go down with the rest of the world. However, as the investors start accepting Brexit as a reality, it would bounce back.
I would expect India’s equity market to go up as more and more UK and Europe based NRIs would start investing or increase their investments in India. UK’s credit rating has been downgraded after Brexit and the growth of economy is expected to go down. So, in comparison, India may look more attractive as an Investment destination for NRIs from UK, EU and Africa.
3. Real Estate:
I don’t see Brexit affecting Real Estate prices / investments in India. However, I think as UK’s importance as International Financial Center would decrease, investment in GIFT city in Gandhinagar, India may become attractive as Mr. Modi is planning to establish it as an International Financial Center.
As Brexit is a negative event in the global context and as it would increase uncertainty in short term, Gold price may increase as Gold is considered a safe/better investment during uncertainty. However, I usually request NRIs investing in Gold to invest outside India because of higher gold price in India due to import cost/duty and of purity/quality concerns. As a result, it may not affect NRIs investing in India.
Brexit will affect materially only the currency rates linked to GBP. The INR/USD or INR/EUR may not be materially affected. The effect on INR/GBP would be as a result of weakening of GBP against all major currencies and not against INR only.
As a result, NRIs from UK will be affected the most. For UK based NRIs that have already committed for investments in India would have to send more GBP to fund those investments.
If NRIs have already invested, they would find their investments in India increase suddenly in GBP. It may be a good opportunity for them to repatriate part of their investments to UK. While repatriation will give positive return on their past investments, they will be missing out on their future investments as the growth of UK would decrease as a result of Brexit, while no major negative effect on growth of India. And, as a result, investments in India would become more attractive now.
Overall, I don’t see much negative effect of Brexit on Investments in India. While there may be some volatility in the Indian markets in short term, in long term, the effect would be mild, just as one of many other events in the world. Actually, I think, in long run, it would be positive for Investments in India as NRIs and foreigners (FPI) increase their investments in India.