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5 things Raghuram Rajan said about Brexit
Friday came as a shock for most people when Britain voted to leave the European Union. The pre-result polls had suggested that Britain would remain. This reassured markets in the days before the results. That's why, investors and markets were taken by a surprise too.
Almost immediately, markets tanked world over. People around the world, including Indians, now brace for high volatility in their currencies and markets. During this time, Reserve Bank of India (RBI) governor Raghuram Rajan met with the press to give his comments.
Here are 5 important takeaways:
Currency exposure matters:
Banks hold foreign currency assets. This exposes them to risks during times of global crises. When asked about the effect of the Brexit on Banks, Rajan agreed that there will be some affect depending on the amount of exposure they have to different currencies. However, he did not think there was anything big to worry about. "But broadly because there have been movements up and movements down, unless you are overly exposed to one particular currency, I do not think immediately there is a cause for worry, though of course we will monitor their balance sheet situations," Rajan told the media.
External sector vulnerability:
External sector risk is when India is exposed to risks because of foreign trade and capital flows. So, anything that affects a country's exports, imports or foreign investments is counted as a threat to external sector. Brexit can be counted as one such threat to the external sector. According to Rajan, a certain amount of volatility in the markets is expected since global markets are quite interconnected in today's world. However, India is less exposed to the external sector than many other countries, the RBI governor explained. This reduces the Brexit's direct impact on our country. He suggested that commodity exporters are likely to be the most hurt because of the slowdown in global growth. India, on the other hand, could benefit from a fall in prices of certain commodities like oil.
Domestic demand to the rescue:
Rajan expects that the Brexit is not likely to affect foreign investment and capital flows into India. A key reason for this is that India is one of the fastest growing economies in the world today. In comparison with many economies, India stands at a relatively strong place. "Being a continental economy with large domestic demand, which hopefully will be strengthening as a consequence of the relatively good prospects for the monsoon, I think we stand out as a reasonable prospect and after the initial concerns, money should return here," he said.
Enough time to rethink strategy:
The main effect of the Brexit will be on companies that have invested in Britain and Europe. The negative impact of such a move, too, may be dulled because it will take around 2 years to negotiate Britain's exit, Rajan told journalists. The only threat is that the exit could affect free movement of goods and services across Europe and Britain as well as the ease with which companies enter the British and European markets. "So those are reasons why you might see over time some frictions develop, but immediately I do not think there would be a dramatic effect on trade, other than over time through both these policy effects as well as perhaps through currency effects," he said.
Liquidity injection:
Brexit has been the cause of much volatility around the world. It has also sparked fears of a slowdown in global economy. When asked how central banks can help out in such a situation, Rajan suggested that central banks can inject liquidity. However, this is only a short-term solution. This may not extend into a long term solution as central banks may not have enough room. "And my sense is that this puts really more of the onus on authorities to ensure that there is no anticipation of copycat effects across the world, that we do not shutdown on trade, we do not shutdown on immigration, we do not shutdown on capital flows," the RBI governor said.
You can read the full conversation with the media here: Read more
Brexit: A good time to invest in stocks Read more
Brexit turned investors quite risk-averse. Many foreign investors exited markets and currencies that considered riskier. This could be seen in the Indian market too. Foreign investors sold assets worth $92 million on Friday after the announcement. This caused the Nifty to fall 4% intraday. The rupee too fell to Rs 68.21/$ levels until the RBI sold dollars to reduce the volatility.