Brexit Issue a Woe for India’s Forex Market & Indian Exporters

Brexit Issue a Woe for India’s Forex Market & Indian Exporters

28 Aug 2019 04:29 PM
 

Britain’s exit from EU has badly affected India as it shuts India’s direct access to the EU markets. Overall, this global event has resulted to several financial and economic implications on the world’s economy and not just Indian economy. It had created a panic among the traders leading into financial market volatility across the world. Consequently, for over a month the alarm bell of risks related to trade, finance and confidence channels rang loud in the forex market.

It has not only weakened the European economy. Along with it, world export level was hurt with weakening European currencies and imposed renewed downward pressure on major exporting countries. Now, the present world situation will largely depend on the kind of trade deal Britain negotiates with EU. It will definitely have no big reductions in its access to a single market.

Manufacturing companies like Jaguar have already stated that just-in-time production models will be severely hampered. Under the no-deal Brexit, the British economy is expected to become smaller and the merits of the Indian companies located in UK and European hubs is also expected to witness lower gains.

Why is Brexit Important for India?

There is a significant impact of the Brexit seen on most of the sectors of the Indian Economy. UK contributes about 3% of India’s exports and the EU about 17%. An economic slowdown in the UK or EU as a result of Brexit could impact India’s already faltering exports. However, some believe that India may also end up getting new trade opportunities with UK after Brexit.

India’s machinery and transport equipment constitute 40% of India’s exports and accounts for nearly 20% of total UK’s trade with India. The UK’s exports of alcoholic beverages also registered a significant increase from pound 14m to 162m from 2002-18.

Impact of No Deal Brexit’s on Forex Market

Surrounded by extreme concerns over fair trade, immigration and national security, UK’s exit from the EU led to GBP reacting negatively. Pricing volatility was high with GBP levels dipping to a record low in the last two years.  The value as reported fell more than 10% in the hours after the vote was made final.

This huge fall out in the currency market knocked down the profit scale of exporters across the world and India being no exception. Now even though the GBP levels are recovering slightly level by level, yet the entire Brexit process had posed tumultuous effect on GBP.

Indian Economy Face an Adverse Effect

Indian companies with Europe exposure like TCS, HCL, Maruti Suzuki face downgrade risks post Brexit. Amid uncertainty looming over the impact of Brexit, analysts have started downgrading the revenue estimates for some of the export oriented companies from Indian IT, automobiles, metal and pharmaceutical sectors which are likely to be hit the most. The EPS estimates of stocks like TCS, HCL Technologies, Maruti Suzuki, Tata Motors, Tata Steel, Balkrishna Industries have been cut as India’s UK and Europe bound exports may come under pressure.

Coming down to export of agricultural produce Indian mangoes, pomegranates, vegetables like lady’s finger, corn and chillies are exported to the UK. Indian exporters are now under severe pressure that they may face a decline in the demand for Indian vegetables. The exchange rate vis-a-vis the pound is likely to have long term implications. Food prices in UK are soaring high and this eventually leads to a drop in demand for exotic vegetables and fruits. Higher selling prices would also lead to a fall in sales.

UK is among the most important destinations for Indian vegetables and fruits and export of fresh vegetables to the UK stood at Rs 183 Crore in 2015-16. The country is also one of the largest importers of Indian grapes and mangoes.  The decline in the demand is mainly due to currency related issues and exporters hope that there would be some benefits like exemption of some duties and relaxation of phytosanitary norms.

Pound struggled near about six months low against the dollar. Dollar also fought for traction against the Japanese Yen as the prospect of Federal Reserve Interest rate cut later in the month. There has been a decline in the reports and this has resulted in the transactions slowing down to a considerable level.

Bottom line

Thus with so much uncertainties looming around, it’s high time that MSMEs who have most of their Forex exposure in making payments for imports and exports from UK and other European Countries, should now think of taking up measured forex management steps. For such, getting in touch with experienced firms offering Forex risk advisory and forex transaction process outsourcing services can turn out to be real boon. The amount of pressure global events have shown in the past 1-2 years has led to a situation where betting on instincts can really damage the financial health of businesses. This therefore makes it pertinent for Corporate to think about outsourcing advisory solutions offered by experienced forex services companies.