By Unni Krishnan - Aug 7, 2011
India will achieve “appreciable” growth this year and the nation’s financial markets can weather “negative sentiments” spreading across the world, Finance Minister Pranab Mukherjee said.
“Our growth story is intact and the fundamentals are strong,” Mukherjee told businessmen in New Delhi yesterday. “Our markets have the capacity to withstand the negative sentiments affecting the external world.”
Indian stocks tumbled, the rupee fell and bonds climbed Aug. 5 on concern the U.S. economy is stalling and Europe’s debt crisis is worsening. After the markets closed, Standard & Poor’s cut the U.S.’s AAA rating for the first time. Mukherjee said India’s challenge is to tame inflation, contrasting with nations from Japan to Switzerland which are trying to support expansion.
“We witnessed some recovery already and this is testimony to our capacity for resilience,” Mukherjee said, referring to the Indian stock, currency and bond markets.
The Bombay Stock Exchange Sensitive Index, or Sensex, lost 387.31, or 2.2 percent, to 17,305.87, the lowest since June 11, 2010, in Mumbai on Aug. 5, after declining as much as 4 percent earlier in the day.
The rupee weakened 0.4 percent to 44.74 per dollar on Aug. 5. It fell to 44.85 earlier, the weakest level since June 29. The yield on the 7.8 percent bond due April 2021 slid 9 basis points, or 0.9 percentage point, to 8.31 percent.
Investment Rate
Mukherjee cited an increase in savings and investment rates “reminiscent of the high-growth East Asian economies” and the young working-age population of India, where over half the people are in their twenties, as factors that will spur growth.
“While the momentum in consumption has been sustained as the economy has recovered from the slowdown in 2008-09, the recovery in private investment growth has been held back,” Mukherjee said. “It is a matter of concern and we must together do what is required to improve business sentiments to restore the investment growth seen in the years before the global crisis.”
Corporate investment in the second half of the fiscal year ended March 31 dropped 43 percent compared with the first six months of the year, the Reserve Bank of India said in a report on July 25.
The central bank last month maintained its growth forecast of 8 percent for the current fiscal year ending March 31. The economy expanded 8.5 percent the previous year.
Repeat Performance
Mukherjee yesterday said India may be able to repeat last year’s growth performance.
By contrast, U.S. gross domestic product data last month showed a 1.3 percent growth pace in the second quarter, after a near stall in the first three months of 2011.
S&P lowered the U.S. rating by one level to AA+, saying policy makers have shown insufficient commitment to reduce the budget deficit. The U.S. Treasury Department said there is “no justifiable rationale” for the move, adding the rating company made a $2 trillion mistake in its calculations.
The S&P decision went further than Moody’s Investors Service and Fitch Ratings, which affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended a debt-ceiling impasse that pushed the country to the edge of default. Moody’s and Fitch both said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
Top Rankings
S&P currently gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt-to-GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, according to S&P.
New Zealand is the only country other than the U.S. that has a AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.
Meanwhile, nations in Europe and Asia are taking steps to prop up growth.
European Central Bank President Jean-Claude Trichet Aug. 4 left rates unchanged and signaled the ECB has resumed bond purchases and will offer banks more cash to stop the region’s debt crisis from engulfing Italy and Spain.
Currency Woes
Japan last week followed Switzerland in seeking to stem appreciating exchange rates that threatened to damage export competitiveness, selling the yen and pledging to inject funds into the economy.
Switzerland Aug. 3 unexpectedly cut borrowing costs and vowed to boost the supply of the franc in money markets to curb a surge in the “massively overvalued” currency.
“There is a crisis,” Mukherjee said. “I am not unnecessarily worried. There is no need to press the panic button.”
He said the changes India started in 1991 to open the economy to foreign investors and cut bureaucracy are “irreversible” and reiterated the government’s plan to narrow its budget deficit to a four-year low of 4.6 percent of gross domestic in the year through March.
The minister said yesterday India’s “major challenge in the short term is inflation, which has implications of sustaining our growth momentum.”
India’s benchmark wholesale-price inflation accelerated to 9.44 percent in June. India’s central bank has raised its repurchase rate 11 times since the start of 2010 and last increased it by 50 basis points on July 26 to 8 percent.
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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