Indian financial markets will experience limited impact from Britain exiting the European Union (EU), according to Moody’s Investors Service, The Hindu reports.
Factors such as subdued global demand, weak rural incomes, higher food inflation and high leverage for some large corporates are likely to have a more immediate effect on the economy, according to Moody’s “At this juncture, we assume that the implications of the U.K.’s decision to leave the European Union on India’s financial markets will be limited,” according to a note from Moody’s Investors Service.
“Exports to the U.K. and the rest of the European Union account for 0.4 per cent and 1.7 per cent of India’s GDP respectively. Only a very large and prolonged slump in imports from these regions, which is not our baseline assumption, would markedly dent India’s exports,” it said.
There are other impediments to higher growth in India, which, however, predate the Brexit vote, according to Moody’s. First, lacklustre global demand constrains exports, which account for around 20 per cent of GDP,” the note said.
“Second, two years of drought have dampened consumption with weak rural incomes and higher food inflation lowering purchasing power. Lastly, high leverage for some large corporates weighs on credit demand while impaired assets in the banking system negatively affect credit supply.”
Corporate deleveraging will likely take some time due to the low global demand and the subsequent impact on revenues and profits. In addition, actions taken by the government are likely to yield mixed results.
Imposition of MIP
“Imposition of minimum import prices for steel, for example, will be mildly positive for the sector,” according to the note. “By contrast, expensive telecom auctions in 2016 will contribute to a further increase in leverage in the telecom sector, which is yet to digest last year’s auction outcome.”
Continued high corporate leverage, low nominal domestic growth and a lack of corporate pricing power will hold back investment activity for at least several quarters with poor asset quality and weak capitalisation likely to restrict public sector bank lending capacity, Moody’s said.