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India keeps fingers crossed on US debt

The markets across the world are jittery as Moody's and other rating agencies are threatening to downgrade the US sovereign debt rating from the top AAA rating.

B.S. Srinivasalu Reddy | August 1, 2011 | Updated 09:00 IST

Indian punters hope the US debt impasse that had been haunting the world markets over the last one week, would get resolved before the deadline of Tuesday, saving the markets from another post-Lehman Brothers type of collapse.

The lower house of the US on Sunday voted down the proposal to raise the debt limit by $2.4 trillion (Rs 106 lakh crore or more than double India's GDP at factor cost of Rs 48.78 lakh crore for 2010-11) from $14.29 trillion (Rs 631 lakh crore) at present. The US government has set a deadline of August 2, 2011 for hiking the limit to the lawmakers, to avoid default on its commitments, including staff salaries.

The markets across the world are jittery as Moody's and other rating agencies are threatening to downgrade the US sovereign debt rating from the top AAA rating. Triple-A rating denotes that the country would comfortably meet its debt as well as interest repayment commitments.

PERSPECTIVE:US debt row adds to global uncertainty

The US has been holding this rating since the inception of sovereign debt ratings. "We hope the debt limit will be extended within the deadline. It is not so serious a matter if one considers that the debt limit was raised 72 times in the last 50 years, 10 of which has been in the last decade alone.

Only the opposition party (Republicans) is holding up the same," said Kishor Ostwal, chairman and managing director (CMD), CNI Research. Coming as it is at a time when many Euro zone countries like Greece and Spain have been facing sovereign rating cuts over the last few months, the threat to the ratings of US, the world' largest economy, is threatening to dry up liquidity in the world economy. It has the potential to increase the cost of funds for the US government and may lead to a series of downgrades of many other sovereign debt ratings, too.

"Though the proposal would get the US lawmakers, failure could threaten global economic growth. As the US economy enters into recession, demand for exports from other countries will fall, investments into riskier assets like equities will dry up, instead they will flow into the safe haven investments like gold and silver," said Alex Mathews, head of research of Geojit BNP Paribas Securities.

There are reports that the US government has a couple of weeks time before the deadline exhausts, giving Democrats led by Barack Obama leeway to convince the Republicans. "The problem in availability of credit in case the debt limit is not hiked could hit consumerism in the US. Besides, commitments towards slashing government expenditure and rising revenues through higher taxes would lower consumer spend. However, that will help bring the US economy back on track," said Mathews.

The sentiments of foreign institutional investors' (FII) towards India do not look very encouraging now. Last week, their net purchase was just Rs 56.97 crore in equities. However, Ostwal feels that the impact of the US developments - positive or negative on debt limit hike - would not have much impact on Indian stocks.

"The market has already factored in the negatives of the debt limit proposal getting rejected by law makers in the US. Even if that materialises, the (Indian) market may take a knock of just three to four per cent before bouncing back," he added.

Courtesy: Mail Today 

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