Why is Brexit causing the Indian markets to tumble?

QUICK PILL

What happened in market

• BSE and NSE both fell significantly after UK\'s decision to leave EU was announced
• Value of the Indian rupee plunged by 96 paise against the US dollar

Why is it happening

• Indian exports are expected to be badly hit by reduced businesses from the UK
• Indian companies with stakes and operation in the UK will also be hit

More in the story

• Why did the rupee value fall?
• How will the Indian economy get affected by Brexit?

After weeks of speculation, finally when the Indian stock markets opened on Friday under the almost confirmed news of Brexit, there was bloodbath in the Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE).

Around Rs 4 lakh crore worth of investors' money was lost within minutes of the opening of the markets.

While BSE sensex nosedived by over 950 points to go below the crucial 27,000-mark, Nifty went below the 8,000-level after the news of Britain opting to 'Leave' flashed on TV screens. Brexit or Britain opting to 'leave' stands for Britain's possible exit from the European Union (EU).

Also read: Why Brexit makes India, Inc. frown

The Brexit also impacted the value of the Indian rupee which plunged by 96 paise against the US dollar and crashed below the 68-level early Friday morning.

Almost every sector witnessed heavy selling due to panic among investors including metals, IT capital goods, auto banking etc.

A heavy demand for the dollar in the international market has lead to the weakening of the Indian rupee.

Looking at the stocks market fall and fall in the value of the rupee, RBI governor Raghuram Rajan, came out and said that the RBI was watching all the markets - "We are ready to act when there is disorderly conduct, disorderly behaviour."

Also read: Should the United Kingdom leave the European Union? Your guide to understanding the Brexit

How is Indian economy impacted by Brexit?

The biggest worry of Indian companies is the fall in global trade due to Brexit.

In its latest economic outlook forecast, the Organisation for Economic Co-operation and Development warned: "A decision to exit would result in considerable additional volatility in financial markets and an extended period of uncertainty about future policy developments, with substantial negative consequences for the United Kingdom, the European Union and the rest of the world".

A slowdown in demand from the world's developed economies will mean reduced business opportunities for Indian companies.

Also read: Brexit: India is prepared for all eventualities, says Economic Affairs Secretary

Indian exports have been falling for the last 17 months. A decline in global trade would mean India's exports sector will have a bad year ahead.

Apart from exports, companies with operations in the UK will also be impacted due to withdrawal of support to its economy under the EU agreement.

The pound has weakened against major currencies since the EU referendum was announced, and has become increasingly volatile leading to fluctuations as the date of voting approached.

Indian companies with stake in the UK

There are currently more 700 Indian-owned small and large-sized companies in the UK, collectively employing more than a lakh of people.

Some of the major Indian companies that have huge stakes in the UK and European markets are: Tata Motors (Jaguar and Land Rover), Tata Steel, Bharat Forge, Motherson Sumi Wockhard, Cipla, Torrent Pharma, Cummins India, IPCA Labs, Kitex Garments, Zodiac Clothing etc among others.

India has emerged as the third-largest FDI source for Britain. A number of Indian companies, from IT and pharmaceutical sectors, use UK as a hub to gain access to the rest of EU.

With Britain being part of EU, Indian companies using it as a hub for exports did not pay additional costs. Once Britain is on its own, the cost of trade for these companies may go up and that will mean a hit on the profits.

Now that Britain has decided to leave the EU, there is uncertainty among Indian companies as to what new rules will be introduced by the government for business transactions with other countries. This uncertainty is not a good thing for the Indian companies.

Edited by Jhinuk Sen

More in Catch on Brexit:

Brexit LIVE: It's official. Britain votes to leave the European Union

Brexit: Pound takes a hit, as early results lean towards 'leave' camp

Brexit impact on India: Sensex falls by nearly 1000 points, Rupee weakens

Also read: What Brexit would mean for relations between India and the UK