India's services exports and investment likely to suffer as fallout of Brexit

India is expected to be affected limitedly from pro-Brexit vote via the trade channel on a net trade basis. But given the uncertainty around Brexit, lower investment flows from the UK and slightly lower services exports to the EU and UK are likely, said Societe Generale in a research report. The Indian economy is unlikely to be affected majorly this year. However, some impact is expected to be seen in FY18 and FY19.

“We expect GDP growth to be lower by about 0.09pp and 0.10pp respectively," added Societe Generale.

India ships around 3.4 percent of its total exports to the UK, whereas imports account for around 1.5 percent of the total imports. Hence a limited impact is expected via the trade channel. But certain amount of investment effect is expected. Britain continues to be the third largest source of FDI for India. This is also expected to be affected. Moreover, service sector import route is likely to be affected due the uncertainty around Brexit.

Meanwhile, inflation projections have been revised upwardly. However, this is not due to Brexit, but because of domestic factors. The recent acceleration in food price inflation is expected to maintain the inflation level elevated. Moreover, there is likelihood that inflation in January 2017 will surpass Reserve Bank of India’s targeted level of 5 percent, according to Societe Generale. However, the central bank is likely to lower rates in Q4 2016 in spite of expected higher inflation.