DR. SANA FATIMA | DR MUKESH BABU GUPTA
The U.S. debt ceiling crisis can have significant implications for global financial markets, including the impact on indices such as the NIFTY. The NIFTY is the benchmark index of the National Stock Exchange of India (NSE), comprising 50 major Indian stocks. While the direct influence of the U.S. debt ceiling crisis on the NIFTY may not be immediate or obvious, there are several ways in which it can indirectly affect the index.
As of May 2023, the outstanding debt of the U.S. is approximately US$ 31 trillion, and it is approaching its debt ceiling of US$ 31.4 trillion, giving rise to the debt ceiling crisis.Alike the global financial crisis decades ago, this U.S. debt ceiling crisis can create uncertainty and volatility in global financial markets. Investors, including foreign institutional investors (FIIs), tend to react to such events by adopting a cautious approach and seeking safe havens. This shift in investor sentiment can result in capital outflows from emerging markets, including India. It can, further, erode investor confidence and increase market volatility. Uncertainty and fear can lead investors to adopt a risk-off approach, which can result in a sell-off of equities, including those listed in the NIFTY. Lower investor confidence and risk aversion can dampen market sentiment and contribute to downward pressure on the index.
Also, if the crisis surfaces for a longer period of time, it can cause investors to move their money from riskier assets to safer ones, such as U.S. Treasury bonds, in order to protect their money. This movement of funds can make developing markets less liquid and cause foreign investors to put less money into Indian stocks. If there are fewer capital inflows, the NIFTY could go down.
A prolonged U.S. debt ceiling crisis can have wider repercussions on the global economy. It can undermine economic growth and stability, which can, in turn, impact global trade, commodity prices, and business sentiment. If the crisis escalates and triggers a broader market turmoil, it can negatively impact investor sentiment across the globe, including in India. Such contagion can result in a general risk-off sentiment, leading to a decline in equity markets, including the NIFTY.As India is an export-oriented economy, any slowdown in global economic activity can affect the earnings of Indian companies.
If the U.S. credit rating starts to drop or people lose faith in U.S. Treasury bonds, the crisis can change the way interest rates work around the world.This can potentially result in a rise in global borrowing costs and impact emerging markets like India. Higher interest rates can affect the profitability and borrowing capabilities of Indian companies, potentially impacting the NIFTY, which is currently just 500 points away from its lifetime high of 18,887.60 levels.The crisis can even impact the value of the U.S. dollar. If there is a loss of confidence in the dollar, investors may seek alternative currencies or assets. As a result, the Indian rupee may experience volatility and depreciation against the dollar. Since the NIFTY is influenced by the performance of Indian companies, a weaker rupee can affect the index negatively, particularly for companies with significant foreign currency exposure.
The global commodity prices may be hit up because of this ceiling crisis. If the crisis undermines economic growth prospects or leads to market instability, it can affect the demand and pricing of commodities such as oil, metals, and agricultural products. As India is a major importer of commodities, fluctuations in commodity prices can impact the earnings and profitability of Indian companies, thus influencing the NIFTY. Further, if the crisis coincides with geopolitical tensions or trade disputes involving India or its major trading partners, it can exacerbate market volatility and add an additional layer of uncertainty for investors.
The response of the Indian government to the U.S. debt ceiling crisis can also have implications for the NIFTY. In times of global market uncertainty, governments often adopt measures to stabilize their domestic economies. The effectiveness and appropriateness of these policies, such as monetary easing or fiscal stimulus, can impact investor confidence and the overall market sentiment, which in turn can influence NIFTY's performance.
It's important to recognize that the relationship between the U.S. debt ceiling crisis and the NIFTY is complex and multifaceted. The interplay of various factors, both domestic and global, determine the overall impact on the NIFTY. Market reactions and outcomes can be highly unpredictable, making it essential for investors to carefully assess and monitor the evolving situation to make informed decisions.
(Dr. Sana Fatima is Assistant Professor, Symbiosis Centre for Management Studies, Symbiosis International (Deemed University) Noida, Feedback: email@example.com. And Dr Mukesh Babu Gupta is Assistant Professor, Faculty of Commerce & Management, Sarala Birla University, Ranchi, Feedback: firstname.lastname@example.org)