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Brexit aftermath: ‘Hangover’ to dominate rupee, stocks; volatility ahead

business Updated: Jun 27, 2016 07:55 IST
Nachiket Kelkar

Share brokers react to falling stock prices on screens of computers and television in Kolkata on Friday, June 24, 2016. BSE Sensex plunged down nearly 1000 points and NSE Nifty fell down below 7,950 following Brexit.(PTI)

India’s equity markets are expected to see more volatility in the coming days as investors, shocked by Britain voting to exit the EU, will scurry to safe haven assets, such as, gold, dollar and yen. This may also have a ripple effect in the foreign exchange market with the rupee expected to slip further.

Trying to soothe frayed nerves, chief economic adviser Arvind Subramanian said in Patna on Sunday that the economy was well braced to bear the impact of ‘uncertainties’ caused. “In economic term, we are well-braced. This appears so, at least in the short run, on the back of solid macroeconomy and good growth prospects.”

Analysts said auto, metals, IT companies, which have a large exposure to the UK market, are likely to see more selling pressure. Tata Group, which is one of the biggest investors and employers in the UK, saw its market cap drop by Rs 30,000 crore on Friday.

A stronger yen could impact Maruti Suzuki’s earnings, and higher trade tariffs, once Britain leaves the EU, could make Tata Motors-owned Jaguar Land Rover’s cars less competitive to rivals, including Mercedes and BMW. A recession across Europe could also hurt India’s exports.

“We expect the overhang of Brexit in the coming week as well and the derivative expiry of June month contracts to further add to the uneasiness,” said Jayant Manglik, president, retail distribution, Religare Securities.

So far in 2016, foreign institutional investors have pumped in Rs 19,884 crore into equity markets. Any further development in global markets could hit inflows.

Markets could recover if the monsoon is good and corporate earnings pick up in 2017-18, analysts said. “India outperformed most equity markets in the last one year. If monsoon is good, India would outperform once again. We urge investors not to panic and use this opportunity to accumulate good quality stocks,” said G Chokkalingam, MD, Equinomics.

The rupee, which weakened 72 paise to a four-month low against the US dollar on Friday, could depreciate towards the 70-mark. “Bond yields could witness some increases as the currency shows depreciation pressures, and there are fears of withdrawal of foreign money on account of risk aversion,” analysts at IDFC Economics Research said.

Uncertainties in the equity market is expected to drive investors towards gold, considered to be the safe haven in times of turmoil.

Buying in gold exchange-traded funds (ETFs) has been the highest since 2009 this year and in the first quarter of 2016, gold ETFs saw inflows of 364 tonnes, against 26 tonnes last year.