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US downgrade to impact markets but not growth, say experts

Lowering of sovereign credit rating of the US by Standard and Poor's will have some short-term impact on India's capital markets but will not hurt growth in the medium to long term, say experts.

business Updated: Aug 07, 2011 12:46 IST

Lowering of sovereign credit rating of the US by Standard and Poor's will have some short-term impact on India's capital markets but will not hurt growth in the medium to long term, say experts.

"We expect that the downgrade itself will have some short term impact on capital markets. Hence, we believe that both equity and bond markets may react immediately when they open after the weekend, but are likely to stabilize thereafter," said Crisil chief economist D K Joshi.

As regards the growth prospects, Ernst and Young's India partner and national leader Ashwin Parekh said, "the US downgrade will not impact our economy badly, as our economy runs on its own cycle. Because of the large domestic market, if at all there is another recession or slowdown in the global economy, our economy will continue to grow".

The Stardard and Poor's on Friday downgraded the US sovereign rating from 'AAA' to AA+, a development which raises concerns that investors will lose confidence in its economy.

As regards the implications of downgrade on India, ICRA managing director Naresh Thakkar, "in the short term there might be some impact, but in the medium to longer term there won't be any impact if India frames its policy accordingly".

The developments and the slowdown, according to Parekh might even help India as likely fall in commodity and oil prices would ease pressure on inflation which is currently hovering above nine per cent, much above the Reserve Bank's comfort level of 5-6 per cent.

"In short, the S&P action will have a positive impact on our economy in the medium term. Of course, there will be some knee-jerk reaction in the markets", he added.

The global recession, Parekh further said, could even prompt foreign institutional investors to park more funds in the Indian markerts.

Expressing similar opinion, Joshi said, the nature and extent of the impact on the domestic economy would depend on the performance of the global players. "I do not see much impact on the real economy because of this development", he added.

However, he added, there could be some impact on merchandise exports which depend upon the performance of the developed economies and global demand.

BCG India partner and director Saurabh Tripathi said that the impact of downgrade will be limited on the Indian IT sector as "American companies will be forced to outsource more of their work to save costs".

In nutshell, he said, "the development in the US will only have a short trem sentimental impact."