The unexpected Brexit vote has caught a complacent global market completely unawares, and will likely have medium-term implications.
The vote will obviously have a direct impact for the UK economy, as it negotiates an unprecedented departure from the European Union (EU), drawn out over the next few quarters and years. But, the impact could spill well beyond the UK. There will be increased speculation on the future of the EU itself, and whether other countries could follow the UK route.
Irrespective of how that plays out, this is bad news for global confidence and, therefore, global growth. As it is, there already were lingering doubts about China, commodities and prospects for global growth - this only makes things worse. Global central banks and governments will no doubt be watching markets very carefully, and will attempt to foster confidence with liquidity, intervention, and the use of fiscal spending. But, with much policy ammunition already expended since the global financial crisis, their ability to soften this blow in the medium run will be severely tested. The volatility we witnessed in all markets in the aftermath of the shock referendum result reflects these underlying fears.
The current situation will take some astute economic and political management to address, and events such as the US elections will now be closely watched. For India, we cannot be immune to these global events. Global risk-off will impact all our asset classes, despite our relative strong fundamentals of a low and controlled current account deficit and fiscal deficit, manageable inflation, reasonable growth and a cushion of forex reserves. As Indian bonds are not part of global benchmark bond indices, all foreign portfolio holdings in India bonds are purely discretionary, and will therefore be very vulnerable to risk-off liquidation. There also is an overhang of unhedged foreign currency exposures, and the coming FCNR repayment. All this makes the need for a credible successor to quickly step into the large shoes of (Raghuram) Rajan even more critical.
All in all, the world faces economic questions that are completely out of syllabus - we will have to grope around for answers.
The author is managing director, regional head of financial markets, Asean & South Asia, Standard Chartered
