America shuts down, opens a window for India

The American government has shut down as the Republicans and the Democrats refused to budge from their respective positions on the healthcare bill.

The impact: About eight lakh government employees will be asked to work without pay, or go on a leave. Besides, US soldiers will not be paid as scheduled; only essential services will be provided for, like the police, fire department, etc, while all non-essential services are halted.

How does it impact India for good

"This (shutdown) just raises uncertainty; we saw large amount of outflows over the last eight weeks. They've really started to go back into emerging markets, in particular to India in September. While we (the US) saw some growth, it does not look like under current conditions that is necessarily going to be a trend until the thing is resolved. Investors will pull back and the saving grace here is that I believe emerging markets are way oversold and that we are going to see a lot of Q4 adjustments to portfolios and some window dressing and that is going to bode well for emerging markets," says Seth Freeman of EM Capital Management.

Could it be a damaging event anyway for Indian markets?

"The general expectation is that the politicians will keep quibbling, but beyond a point, they cannot afford a prolonged shutdown. It has happened many times in the past and it is not for the first time. Typically, the markets have sold off some few percentage points. The average is around 3% sell-off in those 15-20 days when this lasts and then after that, the markets slowly recover. Therefore, for most investors it is a near-term worry, but it is not going to be prolonged because ultimately they have to find a solution. No politician can afford to have a prolonged shutdown of the US," says Jyotivardhan Jaipuria, BofA-ML.

It doesn't impact India Inc?

"In terms of impact on our industry, we do not do very much work for the Federal government. This particular shutdown does not impact the state government where we do some work. So, I do not think on our business there is a direct impact; however, if this continues for a longer period, then there would surely be some macroeconomic factors that will impact and it will start impacting the rest of the industry. But we do not think it will go that far," says Som Mittal, President, Nasscom.

How does it reflect on mobility of Indians to the US for work?

"Yes, it would have very marginal impact but it is only about those people who are here, who have applied for visas. But as I said most of our companies have a larger number of people there in the US; so, we will probably make through with them as I said business travel would become a little more difficult but surely a couple of weeks is something that we and our customers would be able to bear without any impact of sorts on our business. But if it does go on for months, then we have a problem," he adds.

Is it good for the Indian rupee, companies?

"Yes, I believe that could potentially happen (emerging markets doing well because of this crisis). This will have an impact on a lot of things, including the currency and also the ability of Indian companies to raise equity and debt (abroad). If you see return of that (phenomenon), you could see to some extent, a self-fulfilling prophecy where fund flows will help. I think it will hopefully clean up some balance sheets of Indian companies," says Gautam Trivedi, Religare Capital Markets.

 What kind of gains can the markets expect?

"Markets are looking at a cautious gain ...," Jeremy Stretch, Head-forex Strategy, CIBC, said yesterday.

The Sensex, India's benchmark index, saw some volatility in today's trade, and was trading with gains of over 100 points at noon.

And why should the Indian markets not see a positive sentiment as we have seen earlier that Sensex gained over 25% in calendar year 2012 when FIIs flocked emerging markets such as India in search of higher returns when the developed markets were facing crisis.

Also, two quarters ago when the issue of 'fiscal cliff' surfaced, emerging markets benefited. It is likely that history repeats.

Looking not far back, just some days back when QE tapering fears were put to rest 'for the time being' the Sensex had shot up 700 points.

The American government shutdown has happened in the past also ranging from a few days to a few weeks, and sadly, yes, it will have an impact on the country's deficit numbers.

Back to basics, why this shutdown at all? It is because of the lack of appropriated funds, something for which the US government will have to raise its $16.7-trillion debt ceiling. Already under heavy debt, it's a tough decision.

Besides being a tough call, the issue of raising the debt ceiling has become a battle of nerves in the US political arena. It's a deal that is not being reached between the Republicans and the Democrats over the contentious Obama-backed health bill spending.

Previous debt ceiling crisis was averted on Jan 1, 2013, after much mishmash. But now, time has come full circle. The new deadline for America is near - Oct 17 - to decide on whether to raise the borrowing limit.

What happens if US debt ceiling is not hiked?

America's financial department will not be able to borrow more money to meet its debt obligations. There are high chances it defaults on payments, something which Obama says will have 'profound destabilising effect'.