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Even as Indian equity indices shed over 1 percent on Wednesday, led by weakness in global equity markets following the Fitch Ratings downgrade of the US sovereign credit rating, economists in India believe it would have only a limited impact on the real economy.
Most Capital market experts saw Wednesday’s sell-off as a negative knee-jerk reaction and noted that equity markets would re-adjust in the next few days. The impact of Fitch Ratings historic downgrade of US long-term debt from AAA to AA+ will be short-lived on Indian equities, they said.
Several economists, however, felt that the time may have come for the US to rethink its approach to debt as well as governance.
Citing ballooning fiscal deficits and a steady deterioration in standards of governance, Fitch Ratings on Tuesday downgraded its US debt credit rating from the highest AAA to AA+. Earlier in May this year, Fitch put the US credit on “Rating Watch Negative”, which was an implicit warning that a downgrade may come.
Siddhartha Sanyal, Chief Economist and Head Research, Bandhan Bank, said, “Theoretically, the Fitch downgrade should prompt governments across countries to turn more cautious as regards their spending, thereby posing another headwind for growth recovery.
“In the case of India, while the knee-jerk reaction of the equity market is negative, the effect on the real economy should be limited”.
Madan Sabnavis, Chief Economist, Bank of Baroda, said that the “Stock market shiver we saw in India will be temporary. For Indian investors, there should be no worry as things will settle in the next couple of days”.
Nilanjan Banik, an economist from Mahindra University, said that the US debt rating cut is a cause of concern for investors worldwide.
“US debt has always been considered a safe haven, but the recent rating cut suggests that the US Treasury Bills are no longer that reliable”.
INDIAN EQUITY MARKETS
After a weak start led by negative global cues, India’s equity market benchmarks traded under pressure and drifted lower all through Wednesday to close in the negative — down 207 points in the Nifty50 and 676 points on the Sensex. Both indices shed over a percent each from the previous day’s close. Last hour’s buying trimmed some losses.
Some market pundits saw the Fitch downgrade as a catalyst to take some profits off the table. Since April, both Sensex and Nifty have galloped over 17 percent each, fuelled by FPI inflows of over $12 billion.
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Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies LLP, said, “The Fitch downgrade has given markets an excuse to head down, but overall the currency and bond markets have taken it in their stride. Indian markets anyway were somewhat overbought and this was the catalyst for investors to take some money off the table”,
Hiren Ved, Wholetime Director and CIO, Alchemy Capital Management, said, “It can create a temporary risk-off moment for markets. However, it has no long-term impact, as we know that developed market governments are getting more indebted”.
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