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As Fitch Cuts US Credit Rating To AA+ From AAA, How Would It Affect Indian Market?

With this move, market experts in India are now looking at the impact on the Indian market. They are viewing the short-term impact and even the long-term impact and also weighing the widespread implications. What will be the impact on India? Here is what the experts say

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Global credit rating agency Fitch has downgraded US Sovereign rating from AAA to AA+ citing expected fiscal deterioration over next three years, a high and growing general government debt burden and steady deterioration in governance over the last 20 years.

With this move, market experts in India are now looking at the impact on the Indian market. They are viewing the short-term impact and even the long-term impact and also weighing the widespread implications. What will be the impact on India? Here is what the experts say. 

Aamar Deo Singh, Head Advisory, Angel One said that although this wasn’t expected completely, yet it has a significant impact. “Although the Fitch downgrade of the US credit rating to AA+ from AAA was not fully unexpected, it has undoubtedly raised market concerns as this is the first lowering of the US in a decade since S&P Global Ratings did so in 2011. The US credit had been placed on "Rating Watch Negative" earlier in May by Fitch, which served as an implicit alert that a downgrade was probably imminent. Investors are urged to exercise caution since markets are now trading off their record highs, with Indian markets dropping by 1% to 1.3% in today's session as a result of this development,” Singh said. 

Mukesh Kochar, National Head-Wealth, AUM Capital said that the move was signalled in May itself. “Fitch has signalled a possible downgrade in May before the debt ceiling agreement is reached. However, the timing might have surprised the market. Anything happening in the US always impacts the world market. However, we believe that the impact should be short-lived as one rating agency S&P has already downgraded the US to AA+ beforehand. This time the impact should be for a couple of days and the market may focus on other fundamental factors. Impact on the Indian market should also be short-lived and other factors such as earnings, crude prices and RBI policy. and fund flows will be the key to the market. Having said that, the market is heated the world over and may find a reason to correct it,” said Kochar. 

Santosh Meena, Head of Research, Swastika Investmart said, “The recent downgrade of the US rating by Fitch may have a minor impact on the Indian market, but it is unlikely to be a major concern since rating changes often come with certain repercussions. Nevertheless, it could provide an opportunity for some investors to take profits, leading to a possible pullback in the market. Signs of exhaustion are evident at higher market levels, following a strong rally from the lows in March. Foreign Institutional Investors (FIIs) have turned net sellers in the past few days, indicating a cautious stance in the market. If the Nifty index begins to trade below its 20-Day Moving Average (20-DMA) around 19600, it might experience further declines toward 19300 and 18888 levels.”

Sarvjeet Virk, Co-founder & MD, Finvasia said, “"The impact on Asian markets has been severe, with major indices like KOSPI, Nikkei 225, and Hang Seng crashing over 1.5% each. India saw corrections too, but at a broad index level, our market has fared well. Nifty and Sensex plummeted by nearly 1%, and I believe the reaction in India may be short-lived. Recently, India emerged as a preferred destination for inflows among emerging markets, benefiting from a better inflation trajectory and prudent monetary policy. Despite global volatility, India's sharp rally continues, making our market stand out compared to peers. I remain optimistic about India's resilience and growth amidst global developments."

Commenting on the development, Parry Singh, CEO of Red Fort Capital, “The US rating downgrade by Fitch is being called out as one of the major economic events of the current decade. The downgrade came post the controversial debt ceiling raise at the last minute along with consistent erosion of governance in comparison to peers according to the statement by Fitch.” 

Singh added, “The immediate impact is visible across Asian Economies with financial markets displaying turbulence, especially equity markets. The forecasted rise in interest rates might see investment volume being shifted from equity to debt resulting in volatility in coming weeks. Also, the rating downgrade might have an impact on perceived stability of US dollar, which will in turn influence movements across global currency markets. Indian markets will follow the trend of other Emerging Markets in the short run which might reflect in a bear run, but no significant long-term impact can be predicted as of now. There will be no investor panic and FII’s pulling out money out of the markets. The rating downgrade was not unexpected news with Fitch hinting of a downgrade back in early May. This news might already be incorporated in a major investor’s thesis.  FII selling had remained at an all time high in past two financial years and that trend is expected to reverse in the current financial year for the Indian markets.”

Raj Nair, Chairman, Avalon Consulting said, "Looked at differently, everyone worth his salt in the financial business knows about the deteriorating financial governance of the US economy for the past two decades. USA has borrowed to the hilt, but the hilt is flexible; politicians on both sides of the divide have to merely exchange a few fisticuffs before agreeing to a new debt ceiling without even a glance at the economic indices. USA’s interest payment on borrowings were tame when interest rates plunged and debt ballooned. But now with interest rates hiked to fight inflation, interest as a percentage of the GDP has ballooned to levels which are No-No for any other country that is rated by Credit Rating Agencies. But still USA will not get an A Rating instead of AAA which it enjoyed and an AA+ which Fitch gave."

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