America’s Debt Soars to US$36 Trillion, Should the Dalal Street Worry?

America’s national debt has crossed US$36 trillion, which is 124% of its GDP — the highest since World War II. What is more alarming is that the US now spends over US$1 trillion every year just on interest payments, more than its entire defence budget. This isn’t just a financial problem. It’s a big warning signal for Indian investors. 

The Debt Spiral Begins

To fight inflation, the US Federal Reserve has raised interest rates. But now, higher rates have reduced the demand for US government bonds. Countries like China and Japan are already selling their US bonds, forcing the US to borrow more money at higher costs. This has increased debt even further, making it a dangerous cycle.

Years of overspending, big tax cuts, and short-term politics have pushed the US to the edge. The Treasury is now stuck between slow growth and rising inflation, and it's losing control. 

Should Indian Investors Be Worried?

India is tightly connected to the global financial system. When US bond yields rise, foreign investors pull money out of emerging markets like India. The rupee weakens, Indian bond yields climb, and stock markets turn shaky. 

India may have stronger fundamentals today — a stable central bank, strong reserves, and a growing economy — but that doesn’t mean we are immune. The image below shows how previous crises led to a substantial outflow of FII from India in 2008:

Note: The information provided in the line chart here is as per the data available on CDSL’s website.

India’s Market Cap-to-GDP Ratio: A Warning Signal

The rising debt levels in the United States are fueling global concerns about inflation, interest rate volatility, and capital flight from emerging markets. For Indian investors, this comes at a time when domestic equity valuations are already stretched. The table below illustrates how India’s market cap-to-GDP ratio—a broad indicator of market valuation—has surged over the years.

If global sentiment worsens, then Indian stock markets may get overheated and vulnerable. Some stocks, such as Trent and Jio Financial Services, are already trading at premium valuations. Hence, investors should stay cautious and focus on quality to navigate potential risks. 

Read more: Triple-Digit PE Stocks in Nifty50: Growth Story or Bubble Risk?

What Are Investors Doing?

Today, many investors are buying gold and silver as safe havens during uncertainty. They’re focusing on strong, large-cap companies with stable profits and low debt. Dynamic asset allocation funds are being used to balance risk, while many are also cutting personal debt to avoid stress during market downturns. 

At the same time, investors are avoiding high-risk and speculative stocks, which tend to fall sharply in volatile conditions. There's also a move away from overexposure to small-cap stocks, given their heightened volatility and vulnerability in tough market environments. 

Conclusion

The US debt crisis is serious, and its ripple effects will likely be felt across global markets, including India. While India’s economic fundamentals remain relatively strong, our deep integration with the global financial system means we are not immune to shocks.

This is not a time for fear, but for thoughtful action. Investors who stay informed, avoid unnecessary risks, and focus on quality assets can navigate these uncertain times with confidence. The key is to remain grounded, avoid speculation, and prepare your portfolio with a long-term view in mind.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.