Brexit And It's Importance

One of the major global events that are expected to have a big impact on markets is the Brexit. Here is all you need to know about the campaign and why it is important. ‘Brexit’ stands for ‘British Exit’ and it refers to the possibility of Britain withdrawing from the European Union (EU).

The campaign is centered on ending the central control by Brussels and giving Britain the freedom to manage its own affairs. The United Kingdom will hold the referendum on June 23 to decide whether Britain should exit the EU. A referendum is a vote in which everyone of voting age in a country is asked to give their opinion on a political proposal. The participants are asked to either approve or reject it, generally with a ‘yes’ or ‘no’. Whichever side receives more than half of all the votes cast, wins.

If Britain exits the EU, it could impact the economy. While the long term impact of this move has not been estimated, in the short run, it could trigger flight of capital from Britain, compound its current account deficit problems, weaken the pound and increase inflation. The flight of capital could lead to the dollar strengthening in the short term. The exit of Britain could embolden political parties in the opposition in other EU countries to ask for a similar vote to exit the EU. This could have a cascading impact on global financial markets.

If the global financial markets are affected by the Brexit, Indian markets are unlikely to be insulated. For Indian companies operating in Europe especially in UK, there could be a fair bit of uncertainty with the pound expected to weaken. The bigger problem will be a likely selloff in emerging markets, which India is part of, mainly on account of a strength in the dollar and aversion to riskier assets. Let’s hope for a beneficial result of referendum.