India’s markets seem to have, for now, shrugged off the impact of Britain’s vote to exit the European Union. The Sensex and the rupee, no doubt, fell sharply during intra-day trades on Friday, when the “Brexit” results came. Both have since recovered from those lows, so much so that the rupee has cumulatively shed only some 70 paise (one per cent) against the dollar and the Sensex about 600 points (2.2 per cent) since their Thursday close levels. That’s not so steep a drop, compared to the “Taper Tantrum” period of July-August 2013, when the rupee was the target of speculative attacks and foreign portfolio investors pulled out over $ 13 billion from the country’s equity and debt markets. Even yields on the benchmark 10-year government of India bonds have been stable at well below 7.5 per cent.
All these reflect vastly-improved domestic macroeconomic stability between then and now. Between 2012-13 and 2015-16, India’s current account deficit has come down from $ 88.16 billion to $ 22.15 billion, even as average consumer price inflation has halved to 5-5.5 per cent and there has been a return to the path of fiscal responsibility, especially under the present government. Macro-stability apart, India is also one of the few major economies still growing — by at least 5-6 per cent, if not 7.5-8 per cent— amidst a global slowdown. Brexit and the resultant convulsions in the EU may well impact India, both by further hurting its exports and also through lower fund flows in an overall “risk-on” global investment environment. But it could also mean an extended period of low international oil prices and the US Federal Reserve putting off a decision to hike interest rates. These, along with a further widening of the differential between India’s growth vis-à-vis those of other economies, can actually turn out to be the unintended positive consequences of Brexit.
But what happens outside, for good or for bad, is something beyond any country’s control. The policymakers here should, rather, focus on getting their domestic acts right. This would require, first and foremost, sticking to fiscal prudence. There is a strong case for lowering of interest rates today, but any such policy of monetary accommodation will have to be accompanied by a credible commitment to not letting down guard on inflation. This is where the role of an independent central bank matters: The Modi government should move fast in choosing the next RBI governor, who carries the same credibility with the markets as the present one. And yes, the ruling party needs to do something to control elements from within working overtime to undermine those at the helm of both Mint Street and North Block. Countenancing such anarchy can prove costly, particularly in these troubled times.