Will the US credit downgrade trigger long-term turmoil in global markets despite short-term resilience? Here's what top experts say

U.S.-based credit rating agency Moody's has downgraded the US government’s long-term issuer and senior unsecured ratings by one notch to Aa1 from Aaa, citing ballooning budget deficit and high borrowing costs. This one-notch downgrade reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns, Moody's said in its report.

The rating agency, however, changed the outlook to ‘stable’ from ‘negative’, citing balanced risks at ‘Aa1’. The U.S. retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the dollar as global reserve currency, it noted.

The American credit rating downgrade, amid rising debt and political deadlock, is a jolt to the U.S. markets, but may not impact it immediately, said Devarsh Vakil, Head of Prime Research at HDFC Securities.

“In the long run, the U.S. establishment must take corrective measures, as a failed or significantly undersubscribed Treasury auction would represent a severe shock to global financial markets. Such an event could precipitate a crisis of confidence in U.S. government debt, potentially leading to sharp increases in borrowing costs across the economy and rapid asset repricing in equity and corporate debt markets,” Vakil said in a note.

Last week, Indian equity markets experienced a significant rally, easing geopolitical tensions and upbeat global cues. The U.S. stock market experienced a strong rebound, recovering much of the ground lost during the April tariff-induced sell-off. The BSE benchmark Sensex and NSE Nifty rallied more than 4% last week, backed by strong broader markets. The Nifty Midcap100, Smallcap100, and Microcap250 indices outperformed the Nifty by soaring 7.21%, 9.17%, and 9.99%, respectively.

On the other hand, all three major U.S. indices ended on a positive note during the week ended March 16. The Dow Jones Industrial Average, 
the S&P 500, and Nasdaq Composite rose in the range of 2-3% last week. Most U.S. stocks’ weekly gains came following trade negotiations between the world’s two largest economies. U.S. and Chinese negotiators agreed to sharply reduce rates for many recently introduced tariffs for 90 days while pursuing further talks that could result in a longer-term agreement.

“Continuous institutional buying in cash markets, foreign portfolio investors’ net short positions in the index markets, and positive surprises on Q4FY25 earnings season in select stocks make us believe that broad-based growth may give way to more sector and stock-specific performance in the coming periods,” he added.

Technically, the next resistance for the Nifty is seen in the band of 25,200-25,300, where 76.4% and 78.6% retracement levels are placed, respectively. Previous resistance of 24,545, derived by 61.8% retracement, is expected to interchange its role as a support going forward for Nifty, Vakil said.

VK Vijayakumar, Chief Investment Strategist, Geojit Investments, also believes that foreign institutional investors (FII) inflows can continue and the domestic mutual funds sitting on huge cash pile will be eager to buy any dip in the market. “This will impart resilience to the market even when valuations are getting stretched.”

He also highlighted that an apparently perplexing trend from the last trading day is that the market declined, despite institutional buying (FIIs plus DIIs) worth ₹14,018 crore. This indicates that FIIs are increasing their short positions in the derivatives market. So, he expects more volatility ahead.

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)