US downgrade will lead to volatile stock markets

The downgrade of US credit ratings by Standard & Poor's is likely to trigger a fresh round of turmoil in global stock markets this week, leading to high volatility in Indian equities that were battered last week on worries over slowing growth worldwide.

S&P downgraded the US government's 'AAA' sovereign credit rating to AA+ yesterday, a move likely to shake investor confidence in the world's largest economy, triggering a fresh round of shockwaves globally, experts said.

"When the market opens on Monday, it is likely to see heavy bouts of volatility as sentiments are weak at the moment due to uncertain global cues," said Dharmesh Pancholi, Senior Manager-Advisory (Equity), Sharekhan.

On Friday, the Bombay Stock Exchange 30-share index, Sensex, plunged over 702 points intra-day. However, it managed to make partial recovery and closed at 17,305.87 - down 387.31 points or 2.19%. For the entire week, the Sensex recorded a loss of 900 points.

The downslide was on a host of local as well as global concerns. Prime Minister's economic panel lowered GDP growth projection for FY'12 to 8.2% from 9% earlier in the face of high inflation, rising interest rates to tame it and lacklustre first quarter results posted by India Inc.

Globally, debt crisis in the US -- which eventually led to the downgrade despite its resolution by the government last week -- as well as in the euro zone dampened sentiment.

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

It added, however, "The silver lining is the attendant fall in commodity prices (particularly crude), which would be positive especially for resource dependent countries like India, as it would help rein in inflation."

Echoing the sentiment, IIFL's Head of Research Amar Ambani said that amid the worldwide bloodbath, there is hope -- steep fall in crude oil prices is good for India.

Some analysts were of the view that Indian stock markets will make a comeback on Monday. They said the situation might turn out to be a boon in the long-term as India has strong fundamentals among its peers and attracts more international inward financial flows.

Besides, they added that strengthening of the Indian currency against the US dollar will help act as a trigger.

"We expect the market to bounce back after such a sharp fall last week. Moreover, crude oil has declined which is a positive news for India," said Parag Doctor, Associate VP at Motilal Oswal Securities.

Finance Minister Pranab Mukherjee had described the downgrading of the US government by credit rating agency as a "grave situation" and said it has to be analysed.