US debt shakes Indian mkts, but economy safe

Sandeep Singh, Hindustan Times
Mumbai, July 31, 2011

Will the grim debt scenario that is being played out in the US embrace the Indian economy, or will it just be a passing gust of financial wind?

The US stock markets fell for the last six trading sessions, and the Dow Jones Industrial index lost 4.6% as the world's largest economy moved closer to a debt default and a rating downgrade.

The Indian markets followed suit, and in the last four sessions to Friday, the Bombay Stock Exchange benchmark Sensex lost 673 points or 3.6%.

The US debt-ceiling issue may well get sorted out before Tuesday, and even an actual US default may not have a broad impact on India's domestic growth and economic fundamentals. But market sentiments are a different story.

"Previous US debt ceiling revision experiences across several decades suggests that the ceiling will be revised upwards even this time," said Nilesh Shah, president, corporate banking, Axis Bank. "However it will be a big setback for investor sentiment if it technically defaults as the AAA rated economy will get downgraded."

But India's growth is not likely to be hit, feel economists.

"It won't impact India on the macro-economic front. (But) since the global recovery is fragile such a thing will shake the overall confidence," said DK Joshi, principal economist, Crisil.

On the contrary, a rating downgrade of US treasury from its current AAA may actually work to the benefit fo emerging economies, say experts.

US Treasury has been considered a safe haven, and in the past investors shifted from emerging markets to the US treasury in risk scenarios. In the event of a US default this pattern may well change.

"Their pain may become our gain in the medium term and it is possible that people will shift their money from US treasury to emerging markets including India," felt Shah.

"Talks of US debt default have been on for some time now... the immediate reaction will be muted as compared to 2008 (when Lehman Brothers folded up)," he said.