Investors in India have so far been mostly indifferent to the shutdown of the U.S. government, but if the U.S. political deadlock persists, they may have eventually reason to cheer.
The longer the U.S. federal government remains shut, the bigger the negative impact on U.S. economic growth, analysts said. That would make it tough for the U.S. Federal Reserve to end its bond-buying program that has flooded global markets with cash in recent years.
When the U.S. government tapers its bond buying program is important to India and other emerging markets which have become addicted to the easy money. Fears of a Fed taper earlier this year sent the rupee crashing to record low against the dollar which in turn has made imported goods more expensive and triggered more inflation. In response, the RBI halted its rate-cutting cycle and raised its key lending rate, damaging hopes of a quick rebound in growth rates in India.
If the U.S. government shutdown lasts for longer than two weeks, the impact on U.S. gross domestic product growth in 2013 could be 0.8 to 1.0 percentage points, said Upasana Bhardwaj, an economist at ING Vysya Bank Ltd. in Mumbai.
“This will further push back expectations of Fed tapering from December to next year and would lead to more capital inflows which would help the rupee,” she said.
Both the benchmark stocks index and the Indian rupee have gained about 1.0% this week despite the troubles in the U.S.
The rupee has gained about 10% from its record low of 68.80 to the dollar reached on Aug. 28, partly due to the Fed’s decision to leave its bond-buying program intact. The Indian currency, however, it is still trading 13% lower than its level at the beginning of May, before the Fed hinted it was ready to taper its bond buying.
Indian stocks are also likely to do better, said Dhruva Raj Chatterji, a senior investment consultant with Morningstar Investment Management’s India unit.
“To some extent risk appetite [for Indian equities] seems to have come back, and the trend may continue for some more time,” he said.
Foreign investors withdrew a net $300 million to $400 million each month from India-focused offshore funds in July and August, he said. But the net withdrawal trend reversed in the last weeks of September, with the funds seeing net inflows. Foreign institutional investors were net buyers of Indian shares in September after selling for the previous three months.
Of course India’s exports to the U.S. could eventually be hurt by a slowdown there but not by much, economists said.
“The U.S. private sector is still working and not all parts of the federal government have been shut,” said Ms. Bhardwaj of ING Vysya.