The Indian rupee could slide all the way to 68 per dollar if US
lawmakers do not reach a deal to increase the debt ceiling, a report by
Bank of America Merrill Lynch said on Monday.
The US has until October 17 to raise its $16.7 trillion debt limit after which the world's biggest economy will default on its obligations triggering a financial crisis and recession that would echo the events of 2008 or worse, analysts said.
Indranil Sen Gupta and Abhishek Gupta said such a default could lead to a Lehman-type global collapse. A default by the US would also slash about 80 basis points from India's GDP, which means that growth in fiscal year 2013-14 could be as low as 3.8 per cent, according to BofA-ML forecast.
"This assumes that the global shock would pull export growth down to zero," the two economists said.
The scary forecast put Indian equities and currency under pressure on Monday. The BSE Sensex traded around 220 points lower at 19,697 as of 10.31 a.m., while the broader Nifty fell around 70 points to 5,839. The rupee slumped 0.62 per cent to 61.81 per dollar.
"A default would be unprecedented and has the potential to be catastrophic," a US Treasury report said. "Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world."
Mark Zandi, chief economist at Moody's Analytics said a debt default would be a "cataclysmic" event that would roil financial markets in the United States and around the world.
Mr Zandi said that holders of US Treasury bonds would demand higher interest rates which would cost the country hundreds of billions of dollars in higher interest payments in coming years on the national debt.
Most analysts are still hopeful of a resolution and that explains why equity markets across the globe are holding up.
"Political brinkmanship has led the federal government to partially shut down, but we expect an agreement to be reached before the debt ceiling becomes binding," global brokerage Nomura said in a report.
C Jayaram of Kotak Mahindra Bank told NDTV that a default is "extremely unlikely scenario."
"The current shutdown is more about fragile egos... This will get resolved sooner or later and is unlikely to lead to an alarming situation," he added.
The US has until October 17 to raise its $16.7 trillion debt limit after which the world's biggest economy will default on its obligations triggering a financial crisis and recession that would echo the events of 2008 or worse, analysts said.
Indranil Sen Gupta and Abhishek Gupta said such a default could lead to a Lehman-type global collapse. A default by the US would also slash about 80 basis points from India's GDP, which means that growth in fiscal year 2013-14 could be as low as 3.8 per cent, according to BofA-ML forecast.
"This assumes that the global shock would pull export growth down to zero," the two economists said.
The scary forecast put Indian equities and currency under pressure on Monday. The BSE Sensex traded around 220 points lower at 19,697 as of 10.31 a.m., while the broader Nifty fell around 70 points to 5,839. The rupee slumped 0.62 per cent to 61.81 per dollar.
"A default would be unprecedented and has the potential to be catastrophic," a US Treasury report said. "Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world."
Mark Zandi, chief economist at Moody's Analytics said a debt default would be a "cataclysmic" event that would roil financial markets in the United States and around the world.
Mr Zandi said that holders of US Treasury bonds would demand higher interest rates which would cost the country hundreds of billions of dollars in higher interest payments in coming years on the national debt.
Most analysts are still hopeful of a resolution and that explains why equity markets across the globe are holding up.
"Political brinkmanship has led the federal government to partially shut down, but we expect an agreement to be reached before the debt ceiling becomes binding," global brokerage Nomura said in a report.
C Jayaram of Kotak Mahindra Bank told NDTV that a default is "extremely unlikely scenario."
"The current shutdown is more about fragile egos... This will get resolved sooner or later and is unlikely to lead to an alarming situation," he added.
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