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Rekha Dixit
Rekha Dixit


The EUreka moment

82Englishcouple Kiss of life: An English couple locks lips in a kiss chain organised by campaigners to prevent UK from exiting the European Union | AFP

Before Rexit, Raghuram Rajan has to handhold India through Brexit

When a member of a joint family decides whether it should sever familial ties and go alone, or continue in the troubling situation, it is supposed to be a domestic matter, and outsiders should do well to keep out. But when that member is the United Kingdom, and the family the economic conglomerate European Union (EU), all the world and its neighbour is interested.

The issue may not be in their backyard, but its ripples will most certainly be felt on their near and distant shores. Right from US President Barack Obama, who wishes Britain doesn't do the Brexit, to India's External Affairs Minister Sushma Swaraj who claims that the UK is India's gateway to Europe, there's no dearth of opinion and analysis. For the direction that global trade, human movement and political adjustments take in future will depend on whether 45 million people decide, through referendum, to Leave' orRemain'.

The UK has always been reluctant to be too cosy with the EU; it has kept the sanctity of its pound intact, even though it transacts financially with the euro, too. Yet, it has been almost as reluctant to make a clean break from the Continent, either. In 1975, when the country last held a nationwide referendum on whether to continue being part of the European Economic Community, the vote was ‘Remain’. Of late, however, the restiveness has returned, the island nation has been wanting out. Its determination has been reinforced after the Greek economic meltdown and the migrant inflow into Europe, both of which it has had to help sort out, at what many Britons feel is a high personal cost.

The UK's membership in the EU, however, gives the association strength and acts as a check against some other member nations like Germany getting too much clout. A Brit-free EU is not just a weaker body, but also at the risk of bleeding to death, as other nations might want to take the cue, too.

India has strong economic ties with the UK, and is naturally concerned. Didar Singh of the Federation of Indian Chambers of Commerce and Industry said that India is the third largest source of Foreign Direct Investment to the UK after France and the US. Similarly, Britain is the third largest investor in India. As per the Confederation of Indian Industry, there are more than 800 Indian-owned businesses in the UK, employing 1.1 lakh people. The stakes are naturally high.


An assessment paper by the Associated Chambers of Commerce of India notes that the Brexit event is coinciding with concerns over a possible outflow of $20 billion due to redemption of foreign currency non-resident deposits, and financial markets could see an upheaval out of sheer panic in the short term. “In the medium to long term, the funds shuffled in uncertain British and European markets could find way to Indian markets, but in the immediate term, anything can happen, and as a credible economy, we have to be ready for the situation,” ASSOCHAM general secretary D.S. Rawat said.

The good news is that India seems poised to absorb either development. Reserve Bank of India Governor Raghuram Rajan said, “We will do what it takes to moderate market volatility.” Nirmala Sitharaman, Union minister of state for commerce, said the government was looking at the analyses of all the independent investigators and giving them due consideration.

The financial consequences of Brexit is being regarded in three ways: the immediate, short term and long term. The immediate result is an instability in the market. “The first point of impact will be that the pound and euro rates will fluctuate,” explained Shubhada Rao, chief economist, Yes Bank. “The RBI has a surplus of over $360 billion in forex reserves, which is a fair amount to check market volatility. A lot will depend on how ably India handles this surplus. In the short term, there will be small equity market movements with sell offs. The long-term impact will have to be ascertained subsequently.”

There are other considerations, too. How will the result impact students going for higher education to either the UK or Europe? One non-financial reason in favour of Brexit was that the UK would have a say in migration to its lands. Will this be in favour of emigration from India? These, however, are long-term ramifications.

In case Brexit happens, the EU and the UK will have to negotiate terms of separation over a period of two years. This gives Indian planners reasonable time to plan out its long-term strategy. The mood in the market is that India has the resilience, ammunition (in the form of foreign exchange reserves) and strong micro fundamentals, which will help absorb Brexit.

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