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The BSE Sensex fell over 200 points, while the rupee slipped past the 63 per dollar on Monday amid a political standoff in the US that threatens to slow growth and spook investors worldwide. The Wall Street fell on Friday for the sixth day out of the last seven as nervous investors fretted about whether the government could shut down this week.
Here's your 10-point cheat-sheet on the global development:
Democrats, Republicans in showdown over shutdown: The Republican-controlled House of Representatives on Saturday passed a proposal to delay by a year key parts of President Barack Obama's health care law and repeal a tax on medical devices, in exchange for avoiding a shutdown. The Senate is slated to convene Monday afternoon and Majority Leader Harry Reid has already promised that Democrats will kill the House's latest proposal.
What is the US government shutdown? It is a political situation in which the government stops providing for all but "essential" services such as police, fire fighting, etc. So unless Congress raises the federal borrowing cap (the legal limit on how much debt the US government can pile up), some of the government would shut down on October 1 as it will run out of money to pay its bills.
Why will the government stop funding services? The US budget year ends on September 30. The House of Representatives and Senate are considering bills to fund the government past the deadline. But Republicans want to cut off funding for President Barack Obama's health care law as a condition of passing the spending measure. The Senate and the White House are unwilling to agree. Unless one side essentially blinks, a partial shutdown of the government will occur.
Has it happened before? The US federal government has shut down on 17 occasions since 1976.
How will it affect US citizens? About one-third of the government will shut down. About 800,000 of about 2.1 million federal employees will be sent home without pay. National parks will close. The Environmental Protection Agency, NASA and other agencies will close most operations. The military and other agencies involving safety and security would continue to function.
What would be the effect on the economy? A three-week shutdown would slow the economy's annual growth rate in the October-December quarter by up to 0.9 percentage point, Goldman Sachs estimates. If so, the growth rate next quarter would be a scant 1.6 per cent, compared with the 2.5 per cent that many economists now forecast.
What if Congress can't agree to raise the cap in time? It could be disastrous. The government might be forced to immediately slash spending by 32 per cent, the Bipartisan Policy Center estimates. The government could miss interest payments on Treasurys, triggering a first-ever default by the U.S. government. U.S. Treasurys are held by banks, governments and individuals worldwide. Ultimately, a prolonged default could lead to a global financial crisis.
Will the economy escape harm if both deadlines are met? Probably. The last major fight over the borrowing cap, in the summer of 2011, wasn't resolved until hours before the deadline. Even though the deadline was met, Standard & Poor's issued the first-ever downgrade of long-term U.S. credit. That, in turn, led to a 635-point plunge in the Dow Jones industrial average the next day. The International Monetary Fund estimated last month that U.S. budget disputes, like the 2011 showdown, can slow annual growth by up to 0.5 percentage points in other parts of the world.
What about financial markets? The price declines in stock markets have been modest so far as investors feel they have seen this movie before and know how it ends: with another last-minute deal.
High volatility and weak dollar: Andrew Freris of BNP Paribas Wealth Management told NDTV that a possible shutdown will lead to sharp volatility in stock markets and will lead to a weakening of the US dollar, though temporarily.
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