US blues make Indian markets see red

The mood on Dalal Street has soured further after Standard & Poor's cut the long-term US credit rating by one notch to AA-plus from top-tier AAA. But investors have not pressed the panic button yet.

The rating downgrade, which came after the US market hours on Friday, capped a tumultuous week that saw around $2.5 trillion wiped off the value of global equities due to concerns over a US slowdown and the euro zone crisis.

In India, investors lost Rs 268,258 crore (Rs 2,682.58 billion) as key indices fell to their lowest levels in 14 months.

Experts believe S&P's downgrade of the US credit rating will have a short-term impact on the Indian market, and global uncertainties may drag the Bombay Stock Exchange (BSE) benchmark Sensex another 5-7 per cent in the short term. The 30-stock index lost about 5 per cent last week and ended at 17,305.87.

"Everyone already knew the US is the largest debtor nation in history - except S&P and Moody's," influential investor Jim Rogers, chairman of Roger Holdings, told Business Standard.

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He doesn't expect the downgrade to have any impact on global financial markets and emerging markets like India.

As the downgrade was expected for almost a week, the market was prepared, experts said. "Stock markets could go either way on Monday. To the small extent the sell-off was on the rumour of a downgrade, rather than fears of slower growth, at least we have certainty," said Trevor Greetham, director of asset allocation at Fidelity International.

"I do see the downgrade as bad news but not for the obvious reasons. To me, the rating agencies are inadvertently playing a pernicious role in worsening the global policy response to the private sector debt crisis," he added.

Foreign investors, who sold Indian shares worth Rs 1492.20 crore ($336.74 million) last week, were unlikely to view India as a safe haven in these turbulent times, experts said.

"Things were bad even without S&P downgrading the US credit rating. This event, per se, will not change things much beyond a day or two," said Samir Arora, fund manager at Singapore-based Helios Capital Management.

"The world is nervous. India was viewed as a safe haven destination for investors till last year in this kind of a scenario, but sadly we blew up that position due to policy inaction," he added.

Heads of leading domestic brokerages are bracing for some short-term pain.

"The US downgrade was expected for almost a week. Markets were prepared for this and we will not see absolute panic because of this," said Rashesh Shah, chairman of Edelweiss Group.

"However, the downward drift in the Indian market will continue due to the global uncertainties."

In a research note, Edelweiss said, "Overall, risk assets, especially emerging market equities, will continue to face painful bouts of volatility owing to the debt impasse in Europe and the US. This will, in all probability, affect market sentiments in India as well."

The Sensex has lost 1,565 points, or 8.3 per cent, since the Reserve Bank of India raised its key policy rates 50 basis points last month, the 11th increase in 16 months.