Home >Industry >Banking >RBI assures markets ahead of Brexit vote

Mumbai: The Reserve Bank of India (RBI) has said that it is maintaining a close vigil on financial markets and will take all necessary measures to ensure orderly conditions amid an expected surge in volatility as Britain readies to vote whether it should remain in the European Union.

“In the run-up to the referendum in the United Kingdom on its continuing in the European Union (‘The Brexit’), uncertainty about the poll outcome has resulted in some amount of turbulence in global financial markets, including in India. The RBI is maintaining a close vigil on developments, and will take all necessary steps, including liquidity support, to ensure orderly conditions in financial markets," the central bank said in a statement on its website on Wednesday.

Britain will vote on 23 June on whether it should remain in the European Union (EU) or exit. Britain’s exit is expected to have a negative impact on the country’s economy in addition to causing immediate turmoil that global stock and currency markets could witness. Volatility in global markets has already increased with most emerging market currencies weakening over the last several weeks.

The Indian rupee has weakened 2.1% so far in 2016 and trade has been choppy since last week as the date of the referendum nears. Worries in the local currency market had escalated after RBI governor Raghuram Rajan announced that he would not opt for a second term at the central bank. Given that the EU is India’s largest single export market, Brexit could have a deep impact on trade.

As the referendum comes at a time when foreign portfolio investors (FPIs) are turning cautious towards all emerging market economies, including India, the pressure on the rupee is palpable. So far this year, foreign institutional investors (FIIs) have sold $1.55 billion worth of Indian bonds. On Monday, FIIs sold $342.66 million in debt and $78.27 million in equity.

However, the RBI has been assuring the market through several public statements that it is prepared for the volatility and the all-time high forex reserves give adequate cushion to take appropriate measures. At the time of the central bank’s bi-monthly policy in April, Rajan had said that the RBI has defences against volatility. “As I have said repeatedly, we have three defences — good policy; we have longer term liabilities in this country — we have not contracted too many short-term liabilities — and we have a reasonable amount of reserves, all of which should help us weather volatility in financial market," Rajan had said.

In his speech on 13 June, Rajan said that Britain’s exit would be quite “damaging" but reiterated that the RBI is adequately prepared to handle the ensuing volatility.

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