Indian bankers and stock brokers searched for the elusive silver lining in the recessionary dark clouds that are gathering over the world's largest economy. Rating agency Standard & Poor’s provided a fitting end to a volatile week, stripping the United States government of its AAA rating for the first time on Friday night. While the move could push up the borrowing costs of the US government and businesses, who are already deep in debt, most analysts have played it down as symbolic and expect marginal impact even in the US.
NO DIRECT IMPACT
Pratip Chaudhuri, Chairman, SBI, said the downgrade could push up the cost of borrowing for the US by a few percentage points. If the US government is currently paying around 3 per cent for 10-year debt, they would have to pay 3.10 or 3.12 per cent, he said. “But that would not really affect us,” he argued. The S&P downgrade came after the US markets closed, leaving the Asian markets to digest the news first for Monday’s breakfast. Analysts do not expect any major hiccups for Indian stocks. “I don’t expect a significant impact of S&P’s downgrade of US credit rating on the Indian stock market. But gold prices are likely to go up,” said Nirmal Jain, chairman of IIFL (India Infoline).
Gold's appeal as safe haven will continue to keep prices firm, while slowing demand in the US could be a drag on other commodities. Though China has emerged as the leading consumer of commodities, it still cannot completely offset a demand destruction in a US recession putting downward pressure on prices, say analysts. Brazil's Bovespa index heavy with commodity stocks has been the worst performing index in the world this year, losing 23.6 per cent year to date. Indian stocks come close losing 15 per cent year to date. But analysts are yet to give up on India.
C J George, MD, Geojit BNP Paribas Financial Services, expects the events in the West to be in favour of the Indian stock markets in the long term. He expects these developments to result in more inward financial flows to the fundamentally strong India. "The strengthening of the Indian currency against the US dollar will help act as a trigger."
DOLLAR-RUPEE
But not many are writing off the greenback yet. "Dollar still remains dominant and potent currency in the world," Chaudhuri said.
Market participants also feel the US debt downgrade will not have a direct and major impact on the rupee. Fund outflows owing to weak performance of equity markets will make sure rupee is hammered in the near term, but other factors like high interest rates and easing crude oil prices will support the Indian currency in the long run, a Street poll by Business Standard revealed.
RBI POLICY
One positive fallout the Street is counting on is the impact of growth concerns emerging across the globe on the central bank's monetary policy. While inflation remains the prime concern, growth issues would be back on the agenda. RBI has raised key policy rates 11 times since March 2010 to tame inflation and has been keen to moderate credit growth.
Anjan Barua, deputy managing director (global markets), State Bank of India, said, with concerns over growth in Europe and double dip recession, there may be shift in RBI's stance on interest rates. "It may revisit current hardening of stance and take a pause."
"There is difference in the 2008 crisis and the situation now. The regulator is better prepared to deal with the situation. The liquidity in the system is comfortable, unlike the situation post Lehman crisis in 2008, when funds availability had dried up," Barua added.
OUTLOOK FOR STOCKS /BOND MARKETS
Government bond yields seen down on global risk aversion and on expectation that RBI will not hike rates further. But heavy supply lined up this week may help in avoiding a sharp downfall. Though the downgrade may not to have much more than a sentimental impact, the larger economic picture could keep investors away, say brokers.
Nirmal Jain expects markets to be wobbly on concerns over the deteriorating economic conditions in two main economic blocks of the world: the US and Europe. "Another 5-7 per cent correction in benchmark indices is possible in the near term," he added. Such a correction would officially send the Indian market into the grips of bears. A fall below 16,800 levels on the Sensex would mean a 20 per cent correction from the 21,000 peak it touched last November. The Sensex closed at 17,305 on Friday, just 3 per cent short of the official bear territory. George advised investors to buy aggressively "in case there is any nervousness in the market, as happened in 2004 and 2008".
