Morgan Stanley Says India Among Asia’s Least Exposed to Brexit

Updated on
  • Expects RBI to stem rupee volatility, boost cash if needed
  • Indian currency stabilizes after sinking 1.1 percent on Friday

India’s economy will be among the least impacted in Asia by the U.K.’s vote to exit the European Union given its relatively low exposure to trade, according to Morgan Stanley.

The immediate impact of Brexit will likely be felt through the financial channel, that is, volatility in exchange rate and capital-market flows, Morgan Stanley economists including Chetan Ahya in Hong Kong wrote in a report, adding they expect the Reserve Bank of India to intervene to reduce currency swings and take steps to boost cash supply should outflows of foreign money cause liquidity to tighten. The rupee was steady on Monday. The central bank was said to have sold dollars via state-run lenders, according to three Mumbai-based traders, who asked not to be identified.

“Increased uncertainty in the external environment due to U.K.’s vote should add to downward pressures on growth and inflation in the region,” Morgan Stanley economists wrote in the June 26 report. “Hong Kong, Singapore, and Malaysia will rank as those which are most exposed, while the economies of Thailand, Indonesia, Taiwan, Korea and China would be moderately exposed and India and Philippines would be least exposed on a relative basis.”

Shipments to U.K. comprise just 3.4 percent of India’s total exports, government data show. India’s Finance Minister Arun Jaitley pitched for Brexit-spooked investors to put their money in India, touting macroeconomic fundamentals including “a very comfortable external position, a rock-solid commitment to fiscal discipline, and declining inflation.” Local markets should see “calm re-emerging” a few days after Brexit, RBI Governor Raghuram Rajan said Friday as the rupee sank 1.1 percent, the most in 10 months.

Less Impacted

As investors size up the shadow cast by Brexit over emerging markets, everything from Turkish carmakers to Indian technology companies and a South African platinum producer have come under the spotlight.

“The U.K’s vote to leave the EU is likely to have an adverse impact on India’s growth through trade and financial channels,” Ahya and his colleagues wrote. “However, given the lower direct exposure in terms of exports to U.K., we expect the impact to be less on India as compared to other more open economies in the region.”

The rupee rose less than 0.1 percent to close at 67.945 a dollar in Mumbai on Monday, according to prices from local banks compiled by Bloomberg. It is still Asia’s worst-performing currency this year, having weakened 2.6 percent. Indian sovereign bonds gained, with the yield on notes due January 2026 dropping two basis points to 7.46 percent.

Morgan Stanley has a first-quarter 2017 rupee forecast of 71 per dollar, according to a June 24 report by strategists including Andrew Sheets in London. The rupee is just 1.3 percent shy of its a record low of 68.845 hit in August 2013 and Mizuho Bank Ltd. predicts the currency to weaken beyond 70 in the next three months.