Christian Debt Recovery

Debt As Percent Of Gdp

June 5th, 2009 |

Author: Gavin

The US debt crisis – Where India stands

As Wall Street tumbled in the first session following Standard & Poor’s downgrade of the US debt rating late Friday, August 5, the rest of the world saw a panic wave sparking huge exits in their stock markets. The downfall in global markets continued on Monday after top credit rating agency Standard and Poor downgraded the US sovereign debt rating last Friday and cautioned of a further downgrade if the fiscal position of the country did not improve.

All major US indices were down at the open.The euro, already under pressure as initial relief over ECB purchases of Spanish and Italian government bonds petered out and risk aversion took hold, hit a session low falling as low as $1.4148, down 0.7 per cent on the day.Traders said the ECB bought Spanish and Italian debt early in the European session after it said on Sunday it would “actively implement” its bond-buying program.

India is bound to be impacted in this global crisis, atleast in the short term because of the US sovereign debt crisis, though it may also benefit from the economic turmoil as softening crude prices will bring down inflation, prompting the Reserve Bank of India (RBI) not to hike rates.

According to the Reserve Bank of India (RBI) the crisis emanating from downgrading of the US sovereign debt rating would have only limited impact on India. Highlighting the Indian economy’s resilience amid the global financial crisis, the said RBI in a statement that though India is not insulated from such developments, even in the worst phase of the recent global financial crisis, the economy grew by 6.8 percent, suggesting high resilience emerging from domestic factors.

The apex bank added that while downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact.

Expressing apprehensions that the downgrade has raised concerns of continuing turmoil in global financial markets, as investors re-allocate portfolios in response to heightened risk perceptions stemming from both developments the RBI urged the policy and regulatory framework saying they must anticipate and be prepared to respond to turbulent financial market conditions arising out of external developments.The central bank also said that it had sufficient foreign exchange reserves to meet any surge in capital outflow.

The views of the RBI are echoed by FICCI. According to FICCI, an uncertain global environment could, depress India’s exposure to global markets (exports of goods and services, more than a quarter of India’s GDP) and knock off percentage points from India’s GDP growth. However, it is optimistic in that, a possible decline in crude prices may signal a pause in RBI rate hikes, buoying investor sentiments. “Additionally, the spreads between a US sovereign and Indian sovereign paper of comparable duration may decline, thus acting as an enabler to foreign institutional investors inflows into the country. This may have a sobering impact on the current account deficit, even though this may not be exactly desirable.” accorging to a statement issued by FICCI.

About the Author

Paramita Bannerjee is a Financial Analyst by profession. She loves writing and can be reached at bannerjee.paramita@gmail.com