Brexit not to have major impact on India: Moody's

Room for fiscal policy easing in India is constrained by high debt burdened, Moody’s said while predicting that Britain’s exit from the European Union will not have any significant credit impact on the Asia Pacific region. India’s, “room for fiscal policy easing is constrained by a high debt burden, but the sovereigns’ exposure to external financing is limited”, it said.

Moody’s Investors Service said in a report, ‘Sovereigns Brexit and Asia Pacific: Limited Direct Credit Impact; Some Sovereigns Exposed to Market Volatility’, that over the coming months, announcements related to Brexit could trigger financial market volatility.

However, it added: “In particular, although lower GDP growth in the UK will dampen demand for products from the rest of the world, Asia Pacific’s direct trade linkages with the country are generally limited.

“While not our baseline expectation, a shift in portfolio and/or banking flows that resulted in tighter financing conditions in some Asia Pacific markets would hurt growth, especially in countries where fiscal and monetary policy space is constrained.”

Moody’s said India’s exports to UK were 0.4 per cent of the GDP in 2015 while shipments to European Union make up for 1.7 per cent. Consumer price inflation is at 5.6 per cent and government debt at 65.3 per cent of GDP.

“The credit implications of Brexit will also channel through potential shifts in capital flows as investors reassess the risk-return trade-off of investments. Dependence on external funding to finance current account deficits or external debt repayments indicates vulnerability to a slowdown in portfolio inflows,” it said.

In particular, when a government’s borrowing requirements are large, there is a risk that lesser availability of external funding will heighten liquidity pressure, it said, adding that marked shifts in capital flows would imply sharp changes in currency values.

Stating that sizeable depreciations in emerging market currencies would raise the cost of servicing foreign-currency debt, it said where there is room for monetary and/or fiscal policy easing, the domestic authorities may take actions that would partially offset the negative shocks.

Unless currencies depreciate significantly and stoke inflationary pressures, moderate inflation provides space to lower policy interest rates and ease domestic financing conditions, it said.