India Insight:Brexit,India well placed for shocks

We believe India’s fundamentals remain strong in terms of macro stabilityrisks versus its EM peers on policy initiatives and the building of possiblebuffers against external shocks. We expect India’s CAD to remainmanageable within 1% of GDP in FY17. Foreign exchange reserves atUS$363bn (as of 10 June 2016) seem adequate to withstand volatility in thecase of global risk aversion. Net FDI inflows have increased to an all time highof US$36bn in FY16. The government has been making policy efforts toattract more capital flows by liberalising FDI and maintaining reformmomentum. The domestic growth environment has started showing signs ofgradual recovery largely supported by higher consumption demand, especiallyin urban areas and policy efforts to boost public capex. The hopes of a goodmonsoon and quick progress on structural reforms including GST (goods andservices tax), PSU bank’s capitalisation etc will help improve marketsentiment and further strengthen the overall growth recovery.

Brexit will likely weigh on global commodity prices (barring gold) as globalgrowth slows. Considering India is a net commodity importer, lower globalcommodity prices should help in reducing macro stability risks (inflation,current account deficit and fiscal deficit) and give some additional lever to thegovernment to boost public capex. However, the interplay betweencommodity prices and currency will be key.