Wednesday, June 29, 2016


1)    Global economy continues to teeter between “Risks Off” and “Risks On” situations. Brexit escalates Risk Aversion and signals the onset of another ‘Risks Off’ position. Investments will seek safer havens like the US $, Japanese Yen, gold and other precious metals. Sterling and Euro will face rough weather. Currencies like the Indian rupee will appreciate vis-à-vis Sterling and Euro and depreciate against the US $.Nearly $30 billion FCNR deposits mobilized with extra incentives to avert the foreign exchange crisis in 2013 are likely to be closed in HY2 of 2016-17 creating additional pressure on the rupee.

2)    Credit Rating institutions have warned that UK’s rating may witness a downward movement. UK is likely to dip into recession. Unemployment position will worsen. This will have a ripple effect all around.

3)     BIS (Bank for International Settlements) forecasts the onset of “Risky Trinity” of low interest rates, heavy debts and low productivity. Bank of England has already announced that it is ready to pump in Sterling 250 bn equivalent to $345 bn to stave off any liquidity problem. Quantitative easing gets longer life.

4)    The much talked about interest rate hikes in the US will continue to be on hold. This will benefit India and other emerging economies because reverse flow of investments to the US will pause for a longer time.

5)    UK’s likely recession and depreciation of its currency will adversely affect Indian exports (and exports from other countries also) to UK.

6)    London City’s significance as a financial centre of the world will get dented. Consequent loss of employment and revenue will ravage Britain.

7)    Brexit is caused by and leads to fiscal problems like expenditure on refugees, subsidies etc. Ability of monetary steps like reduced interest rate to solve what are essentially fiscal issues is suspect. The world is moving into deeper uncharted waters. Unconventional monetary  policies introduced post global crisis 2007-08 seem to be never-ending.

8)    Brexit is likely to cause an Exit Contagion. If some of the remaining 27 economies decide to exit the EU, problems will get compounded. Brexit already leads to 16% drop in the economic size of the EU. Any further emasculation will greatly reduce the significance of the Union as a strong trading bloc. The US economy will become more unipolar.

9)    Growth in emerging economies barring a few exceptions like our country has already slowed down. The uncertainties created by Brexit will slow it down further.

It appears that Great Britain has cut its economic nose to spite its political face.

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