Fitch, the global credit rating agency, has downgraded the US Sovereign rating from AAA to AA+ citing expected fiscal deterioration, a growing government debt burden, and erosion in governance over the past two decades. The Fitch downgrades are expected to have repercussions on the global economy and financial markets.
The US government has strongly disagreed with the decision, with the White House asserting that the country’s rating improved under President Biden’s leadership, especially considering the strong recovery of the US economy. However, Fitch’s concerns stem from the lack of a medium-term fiscal framework and repeated debt limit standoffs, which have eroded confidence in fiscal management.
The downgrade’s impact was evident in the Indian market, where stocks fell by almost one per cent, following the trend in other Asian markets. Fears of foreign holders selling US Treasuries could lead to increased Treasury yields, which may limit stock market rallies globally.
Fitch’s projection of a mild recession in the US economy by the end of FY23 and Q1 2024, with slowing GDP growth and tighter credit conditions, further exacerbates concerns for the global economy, as the US is the largest economy in the world.
Regarding interest rates, Fitch expects the US Federal Reserve to raise rates further, complicating its goal of curbing inflation. On the domestic front, the Reserve Bank of India (RBI) is closely monitoring inflation and growth data, with analysts anticipating a steady repo rate at the upcoming monetary policy action.
Despite the potential short-term impact on the Indian market, experts believe the market’s focus will shift to other fundamental factors, such as earnings, crude prices, and RBI policy, influencing future trends.
In conclusion, the Fitch downgrades of the US Sovereign rating by Fitch has raised concerns for the global economy and financial markets. It remains to be seen how various economies, including India, respond to evolving monetary policies and economic indicators in light of the US economic situation.
