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Brexit: Don't be penny-wise and pound-foolish

July 4, 2016

Cheap sterling may help, but experts caution that volatility brings in elevated risk Currency markets across the world has been quite volatile since the beginning of the year. First, the Chinese yuan devaluation led to huge volatility in the Asian markets in January-February. Now, the British pound has taken a beating over implications of Brexit - the UK's decision to leave the European Union.

It's now cheaper to visit the UK, a place frequented by Indians as students, tourists as well as professionals. People also visit the UK for medical treatment purposes. The time is also good for the high networth individuals (HNIs), who are considering buying property in the UK, as prices are lower and are falling due to warnings of a housing price slump as a lot of businesses are getting reorganised.

Cheaper pound is a short-term boost to people travelling from India to the UK. It also augurs well for students planning to study in the UK, analysts said.

The pound fell 10 per cent against other international currencies, including the rupee, on June 24 - the day Britain voted to leave the European Union. The sharp fall in pound-rupee exchange rates, from Rs 99.47 a pound on June 23 to Rs 89.54 on July 1, has a lot bearing on those planning to go to different universities in the UK for higher studies, importers and exporters as well as corporates operating from England.

Abhishek Goenka, CEO and founder of forex and treasury solutions firm IFA Global, said, "The Great Britain pound (GBP) has fallen by over 10 per cent against the Indian rupee (INR) post Brexit, which has changed the dynamics for anyone having pound exposure -- be it Indian exporters or students studying abroad. Garment exporters from Mumbai and Tirupur have been majorly hit since their realisation has dropped significantly ever since the GBP/INR fell to sub-90 levels from 100 a few days ago. They may not be able to hike prices due to stiff competition from Bangladesh, Vietnam and Sri Lanka."

"The broad range for pound would be Rs 86 to Rs 95 in the next one year. The Brexit didn't have a big impact on the rupee-dollar exchange rate that may trade around the levels of Rs 65.50 to Rs 68.50 in the coming six months," Goenka added.

According to a Bloomberg survey, the pound will fall even further than its three-decade low reached in the immediate aftermath of Brexit. "Even after a two-day rally earlier in the week, the pound was still down 11 per cent versus the dollar since polls closed on June 23," the Bloomberg report stated.

Currency fluctuations are also a function of risk perception among the forex players in the market, analysts said.

Samir Lodha, managing director, QuantArt Market Solutions, a forex markets consulting firm, said, "Even though Brexit should not fundamentally affect the Indian economy and currency, the fact remains that markets operate on risk sentiments. In a knee-jerk reaction, the rupee depreciated along with all the emerging market currencies. The pound fell around 10 per cent against the dollar and rupee and now the value of pound has fallen to 90 from the earlier level of 100 against rupee. Volatilities in the forex market hurt businesses as well as individuals as it creates uncertainty and makes planning and decision making difficult. However, in certain ways, one can also take advantage of the volatility," Lodha said.

Suresh Sadagopan, founder, Ladder7 Financial Advisories, said, "Hedging is the best option when the currency is very volatile and if one is travelling with a big amount, it can be done through a foreign exchange dealer."

"Those looking to hedge dollar for their dollar denominated goals for upcoming trips abroad for vacation or educational purposes that require a big amount after a period of time, investing in international mutual funds is worthwhile as the amount invested would provide returns in dollar terms," Sadagopan added.

Many Indians purchased property at an opportune time in the US or the UAE when they went cheap. A more than 10 per cent fall in pound provides another opportunity to the HNIs to search for properties in the London property market.

Property prices in London are also likely to come under pressure as many companies operating out of the UK are going to reorganise their businesses now. According to some reports, homeowners in London have already started to cut their asking price on warnings of a slump in the housing market after Brexit.

Anuj Puri, chairman and country head, JLL India, said, "There is no doubt that the UK -- particularly cities like London -- has always held a special attraction for Indians, particularly HNIs with business interests or families there. Such individuals will certainly keep a close watch on the effect of Brexit on UK's property prices, and it is very likely that many more will seek to invest there.

"When economic recession hit the US, Indians took up a leading position among investors keen to take advantage of the falling property prices there. The pound is currently at 31-year low, which itself provides an attractive rationale to foreign investors with an appetite to do so to acquire properties in the UK," Puri added.

However, Indians travelling to the US, including those planning to study there, will face the exact opposite situation as the US dollar has been strengthening against the rupee. With the rupee depreciating nearly 6.5 per cent against the US dollar since July 1, 2015, the rupee-dollar exchange rate has stretched from Rs 63.55 per dollar in July last year to 67.32 per dollar as on July 1.

The rupee is expected to weaken further in the coming months due to the upcoming redemptions of foreign currency non-resident or FCNR (B) deposits - mobilised in 2013 to stabilise the rupee then - will mature in September-November.

Murthy Nagarajan, head-fixed income, Quantum AMC, said, "There is a $20 billion FCNR(B) deposits redemption scheduled from September to November . There is also $6 billion of oil payments to Iran. The total outflow would be around $26 billion-$27 billion over the next 4-5 months. Given this situation, the feeling in the market is rupee will weaken further."

Samir Lodha of QuantArt Market Solutions, said "USD/INR however, likely to be volatile and possibly move towards 70 either during the second half of 2016 or early 2017. While Indian fundamentals remain strong, rupee is highly exposed to global uncertainties and depreciates along with other emerging market currencies during times of global risk off sentiments."

"Cost of travelling to London and UK/Scotland is now down 10 per cent purely based on currency movements of the last one month. Travellers certainly can take advantage of this. They should also look for movements across currencies from time to time. For example, some time ago Brazilian currency depreciated 40 per cent and Russian currency 50 per cent making those an attractive destination to travel," Lodha said.

"If a traveller is looking to secure the low rate of GBP(Great Britain pound), they can hedge the same either in National Stock Exchange or actually can take delivery of GBP currency notes through an authorised money changer.However, if you need to buy dollars then wait for the stability and sub-67 level to secure some hedging," Lodha added.

"Similarly, students who are studying in the UK and the study is expected to continue for next one or two years can actually hedge their future payments either in NSE or with the bank in OTC market - thus securing their payment amount which I am sure will be well within budget," Lodha said.

Ajay Bohora, co-founder, MD & CEO of HDFC Credila - an HDFC-promoted company said, "Any volatility brings in uncertainties and uncertainties mean elevated levels of risks, though the exact impact over the next couple of months is yet to be seen."

"However, with uncertainties crystallising with time and with the better assessment of the situation on the way forward from here, the sharp volatility seen now in the levels of currencies can smoothen over time," Bohora said.

"Also, the fees for higher education is payable over 2-4 years of the course period. It will, therefore, be too early to say that the cost of education would be impacted to the extent of this sudden depreciation of British pound now. However, the uncertainties triggered by the Brexit vote across the European economies would raise questions in the minds of students and parents while deciding on the destination country for their higher education," Bohora said.

"Recent volatility and uncertainties in the UK, EU area and emerging markets, have been a matter of concern to students and parents. On one hand, weaker currencies mean lower cost of education for Indian parents and students while as on the other hand uncertain economic scenario and the emerging protectionist theme triggered by kind of bitter Brexit event, might lead to even more stringent restrictions on immigration norms and guidelines for foreigners in general and on international students in particular. However, with the relatively stable environment and lesser degree of uncertainties in the US economy, we have been noticing Indian parents and students looking at the USA with increased interest," he said.

"Since education lasts a life time, more than the short-term cost impact parents and students have been seen to be looking at more medium and long-terms with a simple question what would I be able to do and where would I be able to find a job after I complete this course from the given country?" Bohora added.

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