Is the US govt shutdown good news for Indian markets?

Updated: Tuesday, October 8, 2013, 11:56 [IST]

After the partial shutdown of the US government, Indian stock markets have rallied substantially on Tuesday and Thursday. Markets were closed on Wednesday for Gandhi Jayanthi.

Dealers say that investors and institutions are betting big, that the shutdown is good news for Indian markets, at least temporarily.

They argue that the partial US govt shutdown will hit the GDP of the US and estimates suggest that the country would lose economic output to the tune of $300 million for each day of shutdown.

What this means is that the US GDP will fall and this is likely to make the US Federal Reserve more reluctant to cut its asset purchase programme.

The Fed has been buying assets to the tune of $85 billion each month to push growth in the US economy and help bring down the employment rate.

This asset purchase programme results in fresh liquidity into the financial system, which often finds its way into emerging stock markets like India. Now, with a weak GDP in the US, the US Fed would have to delay its taper programme and ensuring the easy money flows.

Along with the stock market, the dollar is likely to get weaker against a host of currencies, including the Indian rupee.

In fact, the impact of the US government closure on Thursday has helped the rupee rally against the dollar. The rupee has now recovered and this morning it had surged past the 62 levels at 61.92 to the dollar.

While there were fears that the US Fed would taper its asset purchase programme in its meeting later this month, the fact that the US government shutdown would hit GDP, would make the case for a Fed stimulus taper almost impossible now. Good news for Indian markets and the rupee in the short term.

Of course, if the closure lasts longer then expected it may create panic in markets, including India.

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