Fitch Downgrades US Credit Rating: How Will It Impact Indian Markets?

Global rating agency Fitch Ratings downgraded the United States’ long-term foreign currency issuer default rating from AAA to AA+ with a ‘stable’ outlook on Tuesday. The agency cited fiscal deterioration as well as a high and growing government debt burden. In May, it placed the country’s rating on negative watch due to the debt ceiling fight.

"The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions," Fitch Ratings said.

In 2011, S&P downgraded the US credit rating from AAA to AA+ for the first time in 70 years, saying the budget deal brokered in Washington didn’t do enough to address the gloomy outlook for US finances.

The credit rating reflects the creditworthiness of an individual, company, or government. Different rating agencies follow different criteria for assigning ratings. For Fitch Ratings, an AAA rating is the best, and an AA+ rating refers to high quality. The US credit rating has been reduced to AA+ with a ‘stable’ outlook, which means the creditworthiness still remains strong. The US credit rating downgrade has the potential to impact global markets.

How Will This Impact Indian Markets?

Anything major happening in the US economy impacts the world market. The US benchmark equity index Dow Jones was up by 0.20 per cent on Tuesday after the news about the Fitch downgrade.

On the other hand, the BSE Sensex tumbled over one per cent to below the 66,000 level on weak global cues. Other Asian markets including, Hong Kong, South Korea, Tokyo, Australia, all fell up to 2 per cent following the downgrade by Fitch Ratings. Technology stocks which rely on the US and western markets for business were hit the hardest.

"The downgrade of the U.S. credit rating to AA+ can have significant implications for the financial markets, both domestically and globally. The U.S. Treasury bonds are considered a benchmark for safe-haven assets worldwide. The downgrade may result in higher yields on U.S. government debt as investors demand higher compensation for perceived increased risk. This could lead to a sell-off of U.S. Treasuries by investors seeking higher returns, potentially driving down bond prices," said Jayden Ong, Senior Market Analyst, APAC, Vantage.

He added that Fitch’s downgrade proves that the uncertainties of the US economic system will gradually increase in future, which will put pressure on the Indian equity market in the short term and expect the gold market to continue to be beneficial in this circumstance. 

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said Fitch’s downgrade is a sentiment negative for global markets. The US 10-year bond yield spiking above 4% and the dollar index rising to 102 are near-term negatives for emerging markets.

"But it is important to note that the downgrade doesn’t say anything that the market doesn’t know. So, the negative knee jerk reaction will be short lived. Globally, equity markets have been rising on the US economy’s soft landing narrative. The downgrade doesn’t alter that," he said.

Overall, the Fitch Rating is likely to have a minor impact on the Indian market, as rating changes often come with certain repercussions. According to analysts, the market may focus on other fundamental factors such as earnings, crude prices, RBI policy, and fund flows.