Can a US shutdown trigger a knee-jerk reaction in Indian stock market?
This situation has arisen because, as per media reports, some Republicans in the House of Representatives want to reduce government spending significantly. They are pushing for a showdown on how the government’s money is used.
What is a US shutdown?
In literal terms, a shutdown means a temporary suspension of various government services and functions. A US government shutdown occurs when the federal government’s funding runs out.
Every financial year before September 30, some 438 government agencies rely on Congress for funding allocation. Government funding expires October 1 which is the start of the federal fiscal year and a failure by lawmakers to pass these bills before the commencement of the new fiscal year results in these agencies experiencing disruptions in their regular operations.
As Mint reported earlier, the Congressional Research Service has recorded 14 instances of government shutdowns since 1981, with many of them being brief, lasting merely a day or two. The most recent shutdown, which occurred in December 2018 and extended into January 2019, was also the lengthiest, spanning 35 days. This extended closure was attributed to a disagreement concerning border security.
Read more: US government shutdown looming: What is it? Check which services will likely be suspended
The US shutdown will impact several departments of the US government, including education, healthcare and law and order even though some highly essential government entities will continue to function.
Some of the key economic data, including monthly unemployment figures and price reports, would be temporarily suspended in case of a shutdown, affecting market sentiment and possibly leading to investor uncertainty.
Also Read: US economy shows resilience, but is soft landing a strong possibility?
The impact of a US shutdown could be significant on its economy but is unlikely to trigger a knee-jerk reaction in the domestic market, experts say.
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Limited impact on the Indian market
Many analysts think that the US will avoid a shutdown and the market will not see a major reaction to it.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services underscored news of the US Federal government shutdown has always been hot news leading to a lot of anxiety and concerns. However, Vijayakumar says historically, it has been seen that the Republicans and Democrats reach an agreement at the eleventh hour.
“History will repeat this time also. Markets will ignore this,” said Vijayakumar.
Nitin Agrawal, CEO of Torus Oro PMS believes that the US government shutdown is unlikely and the uncertainty leading to shutdown is not going to impact the Indian markets.
“In the past several times, the US Republicans and Democrats have been able to reach an agreement to avoid a government shutdown. However, to avoid the shutdown, the US government must continue its spending spree. US government debt has already risen to historically high levels and further increases in debt would result in upward pressure on US yields. Higher US rates would result in the reduction of FPI flows in Indian markets as witnessed this month. But overall, the uncertainty over the US government shutdown is not going to impact Indian markets meaningfully,” said Agrawal.
Manish Chowdhury, Head of Research, StoxBox believes that the US government would not risk running the government shutdown for long as the last 34-day shutdown from December 2018 to January 2019 had damaged Trump’s poll ratings.
“Overall, we do not expect a major knee-jerk reaction in Indian markets as the case has been in the past as well,” said Chowdhury.
Deepak Jasani, Head of Retail Research at HDFC Securities pointed out that although the US shutdown does not have any direct impact on the Indian economy or markets, past US shutdowns in 2013 and 2018 and the recent scare in December 2022 saw Indian markets eroding a bit ahead of the dates and post the resolution either going flat or inching up a bit.
Jasani said that there are multiple triggers at this time which could influence the market.
“We will have to be cognizant of the fact that at any time many triggers may be in the works and it may be difficult to attribute market moves to a single trigger,” said Jasani.
Also Read: PIMCO warns market is underestimating risk of US recession and rate hikes
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Updated: 27 Sep 2023, 01:24 PM IST
