Mixed implications seen on India due to US ratings downgrade

New Delhi -  Even as policymakers, including those at the Reserve Bank of India (RBI), sought to downplay the impact of US debt ratings downgrade on domestic economy, experts differ on what's in store due to the crises in the world's largest economy.

Take the case of crude oil. One set of experts say fuel prices could go up if investors move out of US treasury markets to commodities, but others feel the prices may actually fall, since a further slowdown in the global economy can temper demand.

Standard and Poor's, which shook the global financial markets with its decision to cut the US rating last weekend, has said there will be no immediate impact of its action on the Asia-Pacific region. But it has, nevertheless, issued a cautionary note.

For one, India is the 14th largest creditor to the US, with an exposure of $40 billion.

"The adverse impact on Asia Pacific in that scenario would likely require governments to use their balance sheets to support their economies and financial sectors once again. And in our opinion, most governments would promptly oblige," the agency said.

"But some of them continue to bear the scars of recent downturn -- the fiscal capacities of Japan, India, Malaysia, Taiwan, and New Zealand have shrunk to pre-2008 levels. If a renewed slowdown comes, it would likely create deeper, more prolonged impact than last one."

Yet, leading merchant banker and advisory Goldman Sachs actually upgraded India's equity markets, as it saw a turnaround in the medium-to-long term with lower commodity prices, better valuations of stocks and promise of pushing reforms.

"Given the recent developments in the macro landscape, we are moving India to a market weight neutral stance from underweight, which we have held for over a year," said a report from seven of Goldman Sachs analysts.

"We believe enough progress has been made to warrant a relatively more optimistic view."

In this backdrop, it was not surprising to see some huge volatility in the Indian stock markets, which saw a key index oscillate in a wide range of 550 points, with losses particularly severe in the sector-specific index for software stocks.

"The information technology industry will feel the heat as uncertainty and negative sentiments blow across global businesses," said the Associated Chambers of Commerce and Industry.

"An uncertain global environment could depress India’s exposure to global markets and knock off percentage points from India’s GDP growth," warned the Federation of Indian Chambers of Commerce and Industry (FICCI).

Exports of goods and services account for more than a quarter of India’s gross domestic product (GDP), officially estimated at 48.77 lakh crore ($1,083 billion) in 2010-11.

Experts also expressed surprise that India, despite having weathered the global economic crises since 2008 much better than others, its long-rerm sovereign credit rating remains at “BBB-" with a stable outlook.

This, incidentally, is also the rating for Iceland that was on the brink of bankruptcy.

Even the policymakers have sought to take the simplistic view of India benefiting from the crises, with Finance Minister Pranab Mukherjee stating that there could be a larger inflow of money from foreign institutional investors.

Another expectation is if the commodity prices do cool down, especially that for crude oil, it will have a sobering impact on India's inflation rate, obviating the need for the central bank to hike its key rates further.