With the first set of opinion polls on Britain’s upcoming referendum after the killing of MP Jo Cox indicating that the Remain campaign is rebounding into the lead, global stocks rallied on Monday while safe havens such as gold and the Japanese Yen skidded. Indian policymakers, though, are gearing up with evasive action focussed on the most immediate impact of a Brexit — that of trying to ensure sufficient liquidity in the domestic market as Britain gears up for the crucial referendum three days from now on whether or not to remain in the European Union (EU).

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. Two potential casualties, if a Brexit were to happen, could be manufacturing companies that have set up base in the UK while having a substantial exposure to mainland Europe, and firms in the services sector, especially information technology firms.

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, according to Bank of America Merrill Lynch.

The top five Indian firms operating in the UK are Bharti Airtel, HCL Technologies, Emcure Pharma, Apollo Tyres and Wockhardt. Apart from HCL, India’s other top five IT firms too have a presence in the UK. A senior analyst with a brokerage house said that the biggest fear is that Britain’s leaving the Union could have a cascading effect, including more pullouts.

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, according to Care Ratings.

Most stakeholders, though, would prefer to wait for a clearer picture on the broad direction of the British vote. “The EU Delegation is not commenting on the referendum of June 23. It is an internal matter of the UK,” a spokesperson for the Delegation of the European Union in India said in response to a query by The Indian Express, adding that “the EU is and will remain fully committed to its Strategic Partnership with India in all fields of mutual interest, including in trade and economic cooperation”.

The UK is the third largest inward investor into India, after Mauritius and Singapore, with cumulative FDI equity investments of $ 22.7 billion from April 2000 to December 2015 — accounting for 8% of the total FDI inflows into the country. India, on the other hand, is the third largest investor in terms of number of projects into the UK. The number of Indian companies in the UK, growing at more than 10%, has nearly doubled from 36 to 62 firms in a year. The combined turnover of these businesses has increased from £ 22 billion in 2014 to £ 26 billion in 2015, according to Grant Thornton UK LLP-Confederation of Indian Industry (CII) estimates.

While the UK accounted for 15% of India’s total merchandise trade last year, its share has been declining. Trade in services has also eased, with UK service imports from India slowing and making up only about 2% of the total, much lower than with the US and Asia. In this context, a Brexit could potentially open up new trading opportunities with Britain.
(The Indian Express)