Signs of economic weakness, Standard & Poors downgrading of the U.S.

's credit rating and spreading debt crisis in Europe had heightened worries and all eyes were on Fed as it met yesterday. The global stock markets which had witnessed a meltdown over the last 2 days were hoping for some miracle.
In the announcement, the Federal Reserve said it will keep its monetary policy stimulus at least through 2013. It will hold rates low for an extended time. The more explicit time frame was to give a clear picture to the investors / borrowers of how long they will be able to obtain ultra-cheap credit. Rates have been near zero since December 2008. The government auctioned US$ 32 billion in three-year notes which had a high yield of 0.50. Auctions of US$ 24 billion in 10-year notes and US$ 16 billion in 30-year bonds are expected on Wednesday and Thursday, respectively. (For more personal finance stories, you can also visitwww.bankbazaar.com) On the economic front, productivity dropped 0.3% in the second quarter, according to the Labor Department, following a decline of 0.6% in the previous quarter. After the Feb announcement, the US stock markets slipped into red indicating that Fed is running out of ideas. However, at the end of the trading session, Dow saw a surge of 400 points. This was on account of buying stocks at lower levels. Gold prices hit a record US$1,779 an ounce in its biggest three-day rally since the depths of the financial crisis in late 2008. Though the stable rates may bring some relief to the investors, there are signs of the weakness in the US economy. In its announcement, Fed indicated that the economy has grown inconsiderably slower than the Fed had expected Economists believe that another round of quantitative easing was not done mainly due to higher inflation and marginal dip in unemployment rate. The Fed is in a predicament. It does not want to take any action that is not going to have a clear impact on the economy or financial markets. It does not have any monetary policy initiative to address the slowdown, thus raising concerns of a return to recession. IMPACT ON INDIA US outstanding debt stands at US$ 15 trillion. Foreign countries own nearly US$ 4.5 trillion of this amount. Currently, Indias exposure to US debt stands at US$ 41 billion. We are ranked at 14th position in terms of country having exposure to US debt. China ranks first, having an exposure to the tune of US$ 1.15 trillion exposure. As per the finance minister, the recent developments in the US and the euro zone have injected certain uncertainty in global markets. These developments may have some impact on India. However, according to him, Indias growth story remains intact.

Industry chambers feel Indias growth estimate for 2011-12 will hover around 8%, despite the downgrading of US credit rating by Standard and Poors. While there would be some short term impact in terms of slowdown in foreign direct investments into India and weakening global equities could put pressure on the Indian rupee. Also the spike in uncertainty in international markets following a downgrade of US sovereign debt by rating agency Standard & Poors is expected to force Indian companies to put their foreign fundraising plans on the back burner. Further, even the borrowing cost will also go up. While the foreign debt had been cheaper than domestic debt, with the US treasury papers themselves now witnessing a higher rate, the borrowing cost will get expensive as international bonds are linked to US treasuries. However, on the positive side, there would be a decline in crude oil prices. This may bring a pause to any further interest rate hikes by RBI. Further, as per FICCI, the spreads between a US sovereign and Indian sovereign paper of comparable duration may decline, thus enabling FII inflows into the country. The monsoon and sowing season is going well. This also may bring in good news as inflation may go down. Further, lower commodity prices may also aid companies margins. Also the government is taking actions on the policies front. For eg: GoM approves decontrol of urea prices, Indias Group of Ministers approved the draft mining bill which involves the imposition of a mining tax in India and is forwarding it to the Union cabinet, Land acquisition bill prepared for parliament monsoon session etc. If the government takes measures to curb inflation and corruption and implements reforms at a faster pace, the recent corrections in valuations would make it a good investment opportunity to buy fundamentally good stocks. DISCLAIMER BankBazaar.com is an online marketplace where you can instantly get the lowest loan rates, compare and apply online for your personal loan (click here), home loan (click here), car loan (click here), credit card (click here) from India's leading banks and NBFCs.

US credit downgrade will not hit India: FM

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Buy One Flight & Get One Free. Book With Any Airlines. Limited Offer!Cleartrip.com New Delhi, Aug 8 (IBNS) Union Finance Minister Pranab Mukherjee on Mondays said the US credit rating downgrade will not affect India much owing to its growth story and strong fundamentals even as the market took a rebound after the day's initial low. "These developments could have some impact on India but as Indias growth story is intact and its fundamentsal storing we are in a better position to manage this challenge," he told reporters. He said there will be some impact on captial and debt flow but as "Indias growth story is strong we could see FIIs seeing India as an attractive investment destination even if there is any temporary outflow," he said. Indian markets tumbled in early trade on Monday, with the Sensex plunging more than 500 points and the Nifty over 150 points, continuing Friday's sell-off frenzy that seemed to only get hastened by U.S.' credit rating downgrade. But after the panicked sell-off, the markets rebounded. At 1250 hours, the sensex recovered over 300 points while the Nifty had reclaimed the 5,100 levels. The 30-share BSE Sensex was trading above the 17,000 mark at 17181.60. At 10:00 am the Sensex was down 531 points to 16,774 and the Nifty fell 153 points to a new 52-week low of 5,058, hinting at the triggering of extreme bearish sentiments on the Indian markets. The falls were in line with expectations worldwide after credit rating agency Standard & Poors (S&P) on Friday lowered the United States AAA rating for the first time since granting it in 1917, just days after a last-minute debt bill saved the nation from a catastrophic default.

The White House-backed deal, that planned on cutting expenditures worth over $2.1 trillion over the next 10 years but was criticised for not increasing revenue sources including more taxes on the rich, was apparently not enough to satisfy S&P. In a statement, the rating agency said, "We have lowered our longterm sovereign credit rating on the United States of America to AA+ from AAA and affirmed the A-1+ short-term rating." "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the governments medium-term debt dynamics," it said. S&P said that they believed the "effectiveness, stability, and predictability of American policymaking" and political institutions had weakened at a time of ongoing fiscal and economic challenges "to a degree more than we envisioned". Analysts said that though even without the higher rating, U.S. debt remained one of the safest investments in the World, the shift could trigger a "knee-jerk" reaction in the markets, already struggling to stay afloat, on Monday. Reacting to lowering of the America's credit rating downgrade, Indian Finance Minister Pranab Mukherjee on Saturday said the situation is 'grave' and India needs to analyze it. "We will have to analyse it. It will require some time. Situation is grave and there is no gain in making off-the-cuff remarks," Mukherjee told reporters. Earlier, on Friday, Mukherjee said the stock markets fell due to 'global factors'. "This is nothing domestic. It is substantially due to external factors. Stock markets fell due to global factors like weak recovery in US and spread of debt burden in Eurozone. Current volatility is temporary," he said.