Indian companies, markets on edge as the UK votes on EU

The Indian currency and stock markets, and companies with European exposure, remained on edge as the UK goes to vote on a referendum to remain or exit the European Union on Thursday. Apart from roiling the currency and stock markets, the referendum will have wide ranging, long-term implications for Indian companies such as Tata Steel and Tata Motors and information technology services companies which earn a substantial portion of their revenue from the region. 

While opinion polls suggest a neck and neck race between the two camps, the referendum initiated by British Prime Minister David Cameron as part of his 2015 election manifesto is causing deep concerns at home. “This is an unprecedented event that will have impact on cost, labour and capital. If the UK decides to leave, the risk aversion that would set in will take money away from emerging markets to safe havens like the US and Japan. India will see some dislocation in the market in the short-term,” said Arvind Narayanan, executive director and head of treasury at DBS Bank, India. 

The rupee closed at 67.49 vs the dollar, down 17 paise over Monday's close. The 10-year bond closed at a yield of 7.50% level, about the same level as the previous day.  

Stock market analysts said if the UK were to exit the EU, it could change the equation dramatically. “After the US Federal Reserve, it is a major event that is followed by the investors across the globe. Europe would be on the verge of a meltdown, if Brexit happens,” says UR Bhat, managing director, Dalton Capital Advisors. The prospects of Brexit have impacted the oil markets too. In the eventuality of a Brexit, analysts expect a 10% further fall in oil prices in the near future.

Executives of Tata Motors owned Jaguar Land Rover and Tata Steel Europe cautioned their British employees about exiting the EU. JLR CEO Ralf Speth said the UK leaving the EU would be “highly damaging” for the company and would make buying components and selling products in the EU more difficult which is its largest market. “Remaining in the EU will increase chances to grow, create jobs and attract investment,” Speth said. Europe accounts for 57% of Tata Steel's consolidated revenue. 

Another worry for Indian companies is the prospects of a fall in the British currency's value if it exits EU. It could result in lower incomes for information technology companies like Tata Consultancy Services (about 16% of its revenue comes from the UK) and Tech Mahindra (15% of revenue) which earn significant income from the UK.

The good news though is that the punters are betting that the UK will vote to stay in the EU. While the opinion polls are split mid-way, betting house Ladbroke's betting barometer based on live odds was predicting a 76% chance that the UK would stay in the EU at 5:00 PM IST on Tuesday. 

Brexit FAQs 

“Brexit” refers to the UK’s exit from the European Union (EU) – a group of 28 countries. A referendum is being held on Thursday June 23 to decide whether the UK should leave or remain in the EU. 

Why is the referendum being held? 

In 2015, British Prime Minister David Cameron promised to hold this referendum if he won. This was in response to growing dissent that the UK did not have enough say in the EU’s decisions since joining in 1973.

Why the dissent? 

While the British public are evenly split, according to latest opinion polls, the main grouse is that many believe that Britain is unable to grow because of its association with the EU. They also want Britain to take control of its borders and reduce the number of migrants coming into the country to live and work – a marked difference from the key principle of the EU which allows for free movement of goods and people.   

What is the EU? 

It is an economic and political partnership involving 28 European countries. It has become a single market allowing goods and people to move around of member countries. While the UK has maintained its own currency in the British pound, most other member nations use the euro. The EU has its own parliament and sets guidelines on various issues like environment, transport and consumer rights. 

Who will vote? 

British, Irish and Commonwealth citizens who are UK residents and nationals living abroad. 

Why should we care?

* The UK’s exit will lead to a lot of volatility in the pound which can hurt Indian businesses and trade as well. 

* The UK ranks 12th in terms of India's bilateral trade with individual countries. It is also among just seven in 25 top countries with which India enjoys a trade surplus.

* According to data from Commerce Ministry, India's trade with the UK was worth $14 billion in 2015-16, of which $8.83 billion was in exports and $5.19 was in imports. The trade balance thus was a positive $3.64 billion.

* It is also the third largest investor in India after Mauritius and Singapore, with a cumulative inward flow of $22.56 billion between April 2000 and September 2015.

* Infotech companies and the Tata group have strong businesses in the country. A fall in the pound would hurt them. Also, they will have to set up separate offices to operate in other EU countries.

* Work-related visa restrictions have already resulted in a fall in the number of Indian students studying in British universities from 22,385 in 2012-13 to 18,320 in 2014-15, according to the UK Council for International Student Affairs.