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A lot of how the stock market behaves in the near term would depend on the outcome of the political negotiations in the US over the increase in its debt limit before the deadline on Thursday. Inability to raise the debt cap would result in US defaulting on its debt obligations and spark a sell-off across emerging markets including India in the near future. Ratings agency Fitch placed US debt on watch for a downgrade, which threatens the country's top credit rating.
Still, losses in global markets on Wednesday were moderate on hopes the US lawmakers would thrash out an agreement at the last moment. European shares were trading weak at the time of going to print with the FTSE 100 Index down 0.3 percent. Markets in Asia were mixed with Japan and Australia gaining, while Hong Kong and South Korea ending weak. Indian markets were closed on account of Bakri Id.
“In case the deadlock is not resolved, there could be a cascading impact on the rupee and stocks and the forex reserves of several emerging market economies. Those fears could then hit the markets,” said Dilip Bhat, Joint MD, Prabhudas Lilladher. “Further, there could be a downgrade of the US which will cause withdrawal of investments. That fear is still very much in the radar,” he said.
Analysts said Indian equities are vulnerable to shocks in the US because foreign institutional investors (FIIs) own a sizeable chunk of stocks here. FIIs have pumped in close to Rs 4.2 lakh crore or $ 85 billion since January 2009
FII pullouts will result in a slide in the markets and also drag down the rupee, which has stabilized after falling to as low as Rs70 a dollar.
Politicians and bankers have warned of global economic consequences unless the rival political parties-- Democrats and Republicans-- are able to sort out their differences by Wednesday night
A similar political showdown between Democrats and Republicans in 2011 over raising the debt limit had gone down to the wire. Though it was resolved on August 02, 2011 through some last minute negotiations, it led to ratings agency Standard and Poor’s stripping the US of its top-notch credit rating on August 05, sparking a sharp sell-off across global markets. MSI Emerging market index fell 7 percent over the next two days after the downgrade, while the Nifty declined 3 percent in the period.
US laws say a government can spend only if it has enough money coming from taxes or within the borrowing limits. The debt ceiling limits the Treasury’s ability to borrow for the government’s programmes in the absence of adequate revenues. The increase in the debt cap requires the approval of both houses. While Democrats, including US President Barack Obama, are favoring tax increases and lower spending cuts, Republicans want a cut in the social programmes including Affordable Care Act, known as Obamacare.
