Bharti Profit Falls Missing Estimates After Costs Climb

By Ketaki Gokhale - Aug 7, 2012

Bharti Airtel Ltd. (BHARTI), India’s largest mobile-phone operator, reported first-quarter profit slumped 37 percent, missing analyst estimates, after costs increased.

Net income fell to 7.62 billion rupees ($138 million) in the three months ended June 30, from 12.2 billion rupees a year earlier, New Delhi-based Bharti said today. That lagged behind the 12.2 billion-rupee median of 33 analysts’ estimates compiled by Bloomberg.

Bharti joined rival Vodafone Group Plc (VOD) in cutting prices for third-generation data services at least 70 percent in India, where a price war sparked by the entry of operators including Telenor ASA (TEL) and NTT DoCoMo Inc. (9437) drove voice call rates as low as a penny a minute. Bharti, controlled by billionaire Sunil Mittal, also spent more to expand its network, adding to rising finance costs from its acquisition of the African assets of Kuwait’s Mobile Telecommunications Co. (ZAIN)

“They’ve given discounts in 3G, and Bharti and a lot of other players have launched offers of vouchers as well--revenue per minute will come down definitely because of that,” Ankita Somani, an analyst at Angel Broking Ltd. in Mumbai, said before the results were announced. “Interest costs are also higher now because of forex movement.”

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Larsen Turns to Highways as Power Plants Stall: Corporate India

By Karthikeyan Sundaram - Aug 6, 2012

Larsen & Toubro Ltd. (LT), Asia’s largest construction company by market value, is betting on road and rail orders in India and overseas to help maintain growth as power generation projects stall in the South Asian nation.

The company sees an “opportunity” of as much as $35 billion to build highways, rail networks and small airports in the next two years, Chief Financial Officer R. Shankar Raman said. Larsen added 65 billion rupees ($1.2 billion) of road construction contracts in the first quarter of the year that started April 1, he said.

“Road is one area of opportunity in all this compressed investment environment,” Raman said in an interview yesterday in Mumbai where the company is based. Contracts in the “third and fourth quarter are expected to pick up.”

Lack of coal and gas supplies to fire electricity plants have hindered expansion plans of utilities in Asia’s third- largest economy, prompting Larsen to increase focus on infrastructure projects. The company also expects more orders to build transmission networks in India after the world’s biggest blackout last week knocked out power for half of its population.

“Larsen is in a better position than its peers because of its diversified business portfolio,” said Dhananjay Mishra, an analyst at Mumbai-based Sushil Finance Consultants Ltd., who recommends buying the stock. “Even in a depressed investment climate, it can still find orders to grow.”

The company’s shares have gained 41 percent this year, making it the best performer in the benchmark BSE India Sensitive Index. (SENSEX) They rose 1.7 percent to 1,406.2 rupees in Mumbai yesterday. Bharat Heavy Electricals Ltd. (BHEL), India’s biggest maker of power equipment, has dropped 4.3 percent in the past eight months.

Danish Engineers

Larsen, set up in 1938 by two Danish engineers, may report an 11 percent increase in profit to 52 billion rupees in the year ending March 31, according to a median estimate of 17 analysts compiled by Bloomberg. Bharat Heavy’s net income may drop 12 percent in the period, according to 16 analysts.

Larsen is either building or operating 19 road and bridge projects as of the fiscal first quarter, according to a presentation on its website. The company “doesn’t see traction” for its services from the steel, cement and food processing industries, Raman said.

The builder is targeting highway projects in India as Prime Minister Manmohan Singh seeks to step up investments in expressways to remove bottlenecks that choke economic growth. The government aims to award contracts to build 9,500 kilometers (5,900 miles) of roads in the year that started on April 1.

Power Outages

At the same time, coal-supply shortages have forced some of the nation’s utilities to halt expansion. NTPC Ltd. (NTPC), India’s biggest electricity producer, said in June it scaled back plans to add coal-fired capacity by 42 percent because of the fuel’s scarcity. The country depends on coal to generate more than half of its electricity.

Power stations operate below their capacity as supply from Coal India Ltd. (COAL), the world’s biggest producer, lags behind demand. That has contributed to frequent power outages, sometimes lasting as long as 10 hours, in the world’s second- most populous nation. Electricity shortages shave about 1.2 percentage points off the nation’s annual growth, according to the Planning Commission.

Two days of blackouts that left about 640 million people without power last week prompted India’s government to pledge investment in improving the nation’s grid. That may help Larsen add construction contracts, Raman said.

Overseas Sales

Orders from companies in the power sector accounted for 21 percent of contracts Larsen won in the first quarter. In comparison, projects such as roads, bridges and metro rail networks contributed 65 percent. The company added 196 billion rupees of total orders in the period, up 21 percent from a year earlier, according to the presentation on its website.

Profit in the first quarter increased 16 percent, helped by a 26 percent gain in sales, the company said July 23. Operating profit fell 9 percent, the first drop in at least five years, after costs of raw materials and components surged.

Engineering and construction business accounted for 89 percent of Larsen’s sales in the period, according to data compiled by Bloomberg. The company said it had an order backlog of 1.53 trillion rupees as of June 30.

International sales contributed 17 percent of total revenue in the quarter. Larsen aims to earn as much as 25 percent of sales from overseas this year, Chairman A.M. Naik said in May, as India’s economic expansion slows. The nation’s gross domestic product expanded 5.3 percent, the least in almost a decade, in the three months through March.

“Projects have got deferred because business fundamentals have changed,” Raman said. “There is no solution but to invest out of our troubles.”

To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Asian Stocks Pare Weekly Gains Amid Lack of Stimulus

By Jonathan Burgos - Aug 3, 2012

Asian stocks rose, with the MSCI Asia Pacific Index (MXAP) paring the third advance in five weeks after central banks in China, Europe and the U.S. failed to deliver new stimulus needed to bolster growth.
Canon Inc. climbed 7 percent after the world’s biggest camera maker announced plans to buy back its shares. Komatsu Ltd. sank 8.1 after the second-largest maker of construction equipment cut its sales forecast as measures of manufacturing showed global production slowing. China Yurun Food Group Ltd. (1068) jumped 29 percent after billionaire Robert Kuok’s Kerry group became a substantial shareholder in the nation’s second-largest supplier of meat products.
The MSCI Asia Pacific Index gained 0.9 percent to 116.99. The gauge rose as much as 2.4 percent early in the week amid speculation the U.S. Federal Reserve and European Central Bank would unveil measures to spur economic growth.
Shares declined for three days after the ECB failed to announce immediate measures to address the debt crisis, the Fed refrained from adding stimulus to the U.S. economy and China’s manufacturing grew at the slowest pace in eight months.
“Both the Fed and ECB have indicated that they will provide support,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “What was delivered was a commitment to action, but not immediately. It’s a disappointment and a bit of setback.”

Value Lost

About $700 billion has been wiped from the value of the Asia-Pacific index since its Feb. 29 peak as Europe’s sovereign debt crisis threatened to upset the global economic recovery. Through yesterday the benchmark has slid more than 10 percent from its high this year on Feb. 29.
Shares on the gauge trade at 12 times estimated earnings. That compares with 13.3 for the Standard & Poor’s 500 Index and 11.1 for the Stoxx Europe 600 Index.
Australia’s S&P/ASX 200 added 0.3 percent. South Korea’s Kospi Index climbed 1.1 percent. Hong Kong’s Hang Seng Index rose 2 percent. China’s Shanghai Composite Index increased 0.2 percent.
Japan’s Nikkei 225 Stock Average (NKY) fell 0.1 percent, dragged lower by loss-making electronics maker Sharp Corp. which tumbled 28 percent on Aug. 3.
Of the 122 companies on the Nikkei 225 that have reported first-quarter earnings, and for which Bloomberg had estimates, 52 percent have fallen short of projections, according to data compiled by Bloomberg. About 80 percent of technology companies have missed estimates, the data show.

Biggest Advance

China Yurun surged 29 percent to HK$6.14 in Hong Kong, the biggest advance on the MSCI Asia Pacific Index this week. Kerry Group, which raised its stake in the company to 5 percent, is expected to be a long-term investor, according to an Aug. 2 e- mail from Wonderful Sky Financial Group, the public relations company representing China Yurun.
Canon (7751) jumped 7 percent to 2,694 yen in Tokyo. The company is spending 50 billion yen ($639 million) to buy back as many as 21 million shares. The camera maker is among 16 companies on the Topix Index to have announced buybacks during the week.
Tokyo Electric Power Co., the operator of the stricken Fukushima Dai-Ichi nuclear plant, rallied 23 percent to 154 yen after Goldman Sachs Group Inc. said the company would return to profit next fiscal year.
Korea Gas Corp., the world’s biggest liquefied natural gas importer, climbed 11 percent to 49,400 won in Seoul after its Italian partner reported more gas discoveries in Mozambique.

Euro Bonds

Companies that do business in Europe declined after ECB President Mario Draghi signaled the central bank intends to join forces with governments to buy bonds in sufficient quantities to ease Europe’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan.
Mazda Motor Corp., the Japanese automaker that gets about 17 percent of sales from Europe, dropped 4.3 percent to 89 yen. Nippon Sheet Glass Co., which counts Europe as its biggest market, tumbled 15 percent to 60 yen after the glassmaker more than doubled its full-year net loss forecast and announced global job cuts.
Shares also dropped after separate reports showed China’s manufacturing and services industries expanded at a slower pace in July. The government will conduct policy fine-tuning at an appropriate time and consumer inflation may rebound after August, the People’s Bank of China said in a quarterly monetary-policy report on its website Aug. 2.
Komatsu, which gets about 14 percent of sales from China, sank 8.1 percent to 1,621 yen. The company said on July 31 it expects full-year net income of 157 billion yen, down from its April forecast of 190 billion yen.
Sharp Corp. plunged 25 percent, the most on the MSCI Asia Pacific Index, to 192 yen after the maker of Aquos televisions forecast a full-year loss of 250 billion yen. Sony Corp., Japan’s biggest consumer-electronics exporter, fell 5.3 percent to 897 yen after cutting its full-year profit forecast by a third to 20 billion yen. Both companies blamed slumping TV demand and a strengthening yen for their deteriorating earnings.
To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net
To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Sun Pharmaceuticals of India Said to Eye Germany’s Stada By With assistance from Adi Narayan - Aug 2, 2012

Sun Pharmaceutical Industries Ltd. (SUNP), India’s largest drugmaker by market value, is looking for acquisitions in Europe including a possible takeover of German generic-drug maker Stada Arzneimittel AG (SAZ), people familiar with the matter said.

Sun has sought to raise about $1 billion for a European deal, said one person familiar with the matter, who asked not to be identified as the process is private. Company executives recently toured Europe to meet with potential targets, another person said.

Sun’s billionaire founder, Dilip Shanghvi, has followed a strategy of acquiring under-performing or unprofitable companies and merging their operations into the Mumbai-based drugmaker. Sun bought controlling stakes in 10 companies in the past 14 years, including the acquisition of a majority stake in Israel’s Taro Pharmaceutical Industries Ltd. (TARO)

“We believe that Sun may look at larger-size acquisitions going forward,” Saion Mukherjee and Aditya Khemka, Mumbai-based analysts for Nomura Holdings Inc., said in a May 31 report.

Stada, based in Bad Vilbel, Germany, fell 6.3 percent to close at 23.95 euros in Frankfurt trading yesterday, giving the company a market value of 1.4 billion euros ($1.7 billion). The stock declined after Deutsche Bank AG said the company will report “slightly weaker earnings momentum” next week and cut its stock-price prediction to 32.5 euros from 34 euros. The decline pared the stock’s gain this year to 24 percent.

Stock Gain

Sun fell 0.6 percent to 655.9 rupees in Mumbai trading yesterday, valuing the company at 675 billion rupees ($12 billion). The stock has climbed 32 percent this year, compared with a 24 percent return for the 17-company BSE India Healthcare Index.

A spokesman for Sun said the company wasn’t in talks to buy Stada. A spokesman for Stada declined to comment on a potential deal.

Sun has about $927 million of cash reserves and may seek acquisitions to broaden its geographic breadth or enhance its presence in the U.S., according to Nomura.

A Sun acquisition of Stada would be “a surprising deal” if the Indian company’s main goal is to grow in the U.S., Odile Rundquist, a Geneva-based analyst for Helvea SA, said in a telephone interview yesterday. “I don’t really see the attraction,” Rundquist said. She has a neutral rating on Stada’s shares.

Sales in Europe

The Mumbai-based company began exporting drugs to Europe in 2010. Last year, 42 percent of the company’s sales were branded drugs in India, 39 percent were generic medicines in the U.S. and 11 percent were branded generics in other regions including Europe, according to its 2011 annual report.

Sun’s chairman is Israel Makov, a former chief executive officer of Teva Pharmaceutical Industries Ltd. (TEVA) who helped build that company into the world’s biggest generic-drug company.

Nearly 96 percent of the 1.72 billion euros that Stada receives from medicine sales came from Europe, with Germany and Russia being the two biggest markets, according to its 2011 annual report.

Stada would consider merging with a similar-sized branded or biotechnology drugmaker, Chief Executive Officer Hartmut Retzlaff said in October. The company has been the subject of takeover speculation in the past, and the acquisitions of similar-sized competitors Ratiopharm GmbH and Actavis Group hf have widened the gap between it and generic-drug industry leaders.

Stada acquired Serbia’s Hemofarm Koncern AD in 2006 for 480 million euros, the company’s biggest acquisition and part of a push to shift manufacturing capacity as well as sales into eastern Europe. The company took a 96.9 million-euro writedown before taxes in the third quarter last year for unpaid bills from its Serbian business.

Pharmacists and doctors own about 12 percent of the shares in Stada, which was founded in Dresden in 1895 as a pharmacists’ cooperative.

Suzlon Bonds Rally Most in Two Years on Redemption By Anoop Agrawal and David Yong - Aug 2, 2012

Suzlon Energy Ltd. (SUEL) handed its convertible bondholders the biggest monthly gain in more than two years after India’s largest wind-turbine maker redeemed $360 million of debt and averted default.

The company’s $175 million zero-coupon note due July 2014 rallied 8 percent in July, the most since December 2009, pushing yields down to 29.1 percent from 32.7 percent, prices from Elara Capital Plc. show. Its debt due October 2012 gained 2.3 percent. India’s equity-linked notes rose 1 percent last month, underperforming the 2 percent return on South Korean and Hong Kong bonds, Barclays Plc indexes show. Comparable U.S. securities returned 0.8 percent.

Suzlon shares have jumped 8.8 percent since July 27, when the Pune-based company repaid bondholders with the proceeds from bank loans and asset sales amid intense competition and an industry supply glut. The redemption came on the last day of the 45-day grace period it had sought to avoid default after sales slowed due to the debt crisis in Europe. Sun Global Investments Ltd. and Acropole Asset Management are among holders of the turbine maker’s debt.

“There is reason to be a bit optimistic on Suzlon after the spate of bad news,” Raj Kothari, a convertible bond trader at Sun Global in London, said in a July 30 telephone interview. “Confidence is restored to some extent.”

Suzlon redeemed the convertible bonds after borrowing $300 million from 11 lenders including State Bank of India and ICICI Bank Ltd., according to a person familiar with the matter.

Asset Sales

Chief Financial Officer Kirti Vagadia had said on June 25 the turbine maker expects to raise $60 million by selling a factory in China and, on July 26, Suzlon announced the completion of a sale of wind-farm assets in India for $40 million.

Suzlon posted three straight years of losses and is seeking to reduce debt and increase orders. The wind-power equipment maker reported a fourth-quarter loss of 3 billion rupees ($54.1 million) on May 25 as sales declined and finance costs increased. The company is due to report first-quarter earnings this month.

Repower Systems SE, its German unit, on July 31 reported winning cumulative orders of 219 megawatts from Australia, France, Germany, Italy and Poland over the last two months. Suzlon gets more than 50 percent of its orders from Europe.

The company bought a 7.7 percent stake in Repower in 2007 and gradually expanded its holding over four years. In October 2011, it bought out minority shareholders’ remaining 4.8 percent stake. In January this year, Suzlon acquired 49 percent of PowerBlades GmbH it didn’t already own for an undisclosed sum.

Funding Acquisitions

“Suzlon has been aggressively raising money to make foreign acquisitions in a risky industry,” said Xavier Linsenmaier, a convertible bond manager at Acropole in Paris, which manages 750 million euros ($922 million) including the Indian turbine maker’s 2016 bonds. “Suzlon has the right products. I hope they can deliver to make everyone happy.”

The company has $922 million in revolving facilities, according to data compiled by Bloomberg. It also has $406 million of convertible bonds outstanding, including two issues amounting to $142.2 million coming due in October 2012.

“We are working with multiple levers, including internal accruals, sale of non-critical assets, bank loans and capital market options to address future obligations,” Suzlon said in an e-mailed statement today.

Rupee Risk

Suzlon faces the risk of higher costs as a weakening rupee and slowing economic growth discourage overseas investors from buying Indian assets, said D.K. Aggarwal, who oversees almost $300 million as chairman of SMC Investments and Advisors Ltd.

The local currency’s 4.9 percent drop this year has made it the worst performer among the 11 most-traded currencies in Asia.

“The rupee is still vulnerable to external and domestic shocks,” New Delhi-based Aggarwal said in a July 31 interview. “That may spell a bit of a problem for convertible bonds, including Suzlon’s debt. So, there’s no absolute comfort on the repayment aspect.”

The rupee has tumbled almost 21 percent against the dollar in the past 12 months while the benchmark BSE India Sensitive Index (SENSEX) declined 5.1 percent in the same period. The yield on the 8.15 percent government bond due June 2022 rose seven basis points in July to 8.25 percent. It declined two basis points, or 0.02 percentage point, to 8.21 percent as of 1:45 p.m. in Mumbai, according to the central bank’s trading system.

Interest Rates

Reserve Bank of India Governor Duvvuri Subbarao on July 31 left the benchmark repurchase rate unchanged at 8 percent for the second straight meeting, citing price pressures.

He raised the central bank’s inflation forecast to 7 percent from previous a projection of 6.5 percent, while lowering its economic growth estimate to 6.5 percent for the year ending March 2013 from an earlier prediction of 7.3 percent. Gross domestic product expanded 5.3 percent in the three months ended March 31, the least since 2003.

Suzlon’s zero-coupon bond due Oct. 10 has climbed every month since February, pushing its yield down to 51.7 percent from 70 percent at the beginning of the year, according to prices from Elara Capital. Its 7.5 percent note, which matures on the same day, has also rallied in the past five months, cutting its yield to 58.8 percent from 68.4 percent.

“For those who are comfortable with Suzlon’s credit for the next three months, the next attractive opportunity is the October 2012 bonds,” said Mikhail Filimonov, a New York-based managing partner at Odyssey Investment Management LLC., which manages hedge funds with $150 million of assets and owned bonds that Suzlon redeemed on July 27. “We are pleased the company did whatever it needed to do to service its debt.”

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

Singh Answers Sought as Worst Power Crisis May Hurt Growth By Andrew MacAskill and Kartikay Mehrotra - Jul 31, 2012

Keeping the lights on has emerged as Indian Prime Minister Manmohan Singh’s most immediate challenge.

The economy growing at its slowest pace in nearly a decade, the prospect of a drought, and having his government battered by 18 months of policy reversals and corruption allegations were bad enough. Two power-grid collapses in 36 hours have left 600 million people sweating through a failing monsoon, heaping more pressure on a prime minister whose legacy as an economic manager is coming under increasing scrutiny.

“This looks even worse than it would normally because there’s an impression that India’s economy is falling apart right now,” said Surjit Singh Bhalla, chairman of New Delhi- based Oxus Fund Management, of this week’s power network failures. “In any normal time, people may say that accidents happen. Right now everyone is looking at Singh to see what, if anything, he is going to do to fix the problem.”

India is in the throes of its worst ever power crisis after two days of blackouts that highlighted poor infrastructure and lack of investment in its generating and transmission sector. Half of the country’s 1.2 billion people were left without any electricity for more than five hours yesterday, halting transport networks and forcing businesses and emergency services to rely on generators.

Investment Plan

Singh is seeking to secure $400 billion of investment in the power industry in the next five years as he targets an additional 76,000 megawatts in generation by 2017. India has missed every annual target to add electricity production capacity since 1951.

The electricity disruptions weren’t sufficient to halt a rally in the stock market, as the BSE India Sensitive Index, or Sensex, advanced for a third straight session. It rose 0.5 percent to 17,236.18 at the close yesterday. The rupee retreated for a second day, losing 0.1 percent to 55.6550.

As engineers worked to reconnect nearly two dozen states to the national grid, the man who began the day as power minister, Sushil Kumar Shinde, ended it in charge of the home ministry, the cabinet’s third-most prominent position, after a reshuffle of Singh’s team of ministers.

Singh tacked the power portfolio on to the duties of Minister for Corporate Affairs Veerappa Moily, a move a former regulator said smacked of an inadequate government response to the crisis.

Accountability Question

“Heads should be rolling, but instead the power minister is going to be made home minister,” said S.L. Rao, former Chairman of the Central Electricity Regulatory Commission, who was in charge of overseeing the industry from 1998 to 2001.

The government, which has said the outages may have been triggered by states exceeding the amount of power they are allowed to draw from the national grid, announced that it has tasked a committee with investigating events leading up to the shutdown.

India’s northern electricity grid collapsed for a second time at about 1:15 p.m. yesterday, knocking out the networks in the country’s east and northeast. These states together account for about 40 percent of India’s total electricity generating capacity, according to the Central Electricity Authority.

Commuter trains in the capital stopped running yesterday, forcing the operator, Delhi Metro Rail Corp., to evacuate passengers. NTPC Ltd. (NTPC), the biggest generator, shut down 36 percent of its capacity as a precaution, Chairman Arup Roy Choudhury said by telephone. More than 100 inter-city trains were stranded, Northern Railway spokesman Neeraj Sharma said, as the blackout engulfed states in the north and east.

Hospital Disruption

Among those affected by the outage was 62-year-old Pramitha Devi, who was bidding to take the metro toward Ram Manohar Lohia hospital in New Delhi after her home dialysis machine was damaged by electricity fluctuations. A doctor who identified himself as R.C. Bhargava said the hospital’s generators had not been fully refueled since the July 30 grid collapse, leaving them with about two hours of electricity for the intensive care unit. “We have to make plans to shift critical patients to other hospitals,” said Bhargava.

Beset by political challenges, the blackouts are the latest problem to torment Singh’s government. Tussles over policy making with allies in the ruling coalition, corruption allegations and defeats in regional elections have weakened the administration since late 2010.

‘Highly Embarrassing’

“It’s highly embarrassing in that it again shows we can’t provide basic services to our citizens,” said Mohan Guruswamy, chairman of the Centre for Policy Alternatives in New Delhi and a former finance ministry adviser. “It tells you a lot about the quality of management and their focus on maintenance.”

Proposals to allow foreign retailers to open supermarkets and lift overseas investment caps on the pensions and insurance sectors are among the policy initiatives of Singh’s second term to be rejected by opposition groups and coalition allies. By contrast, Singh as finance minister 20 years ago attacked regulatory burdens that held back private companies.

Power cuts are common across swathes of India as the country battles an average 9 percent shortfall in meeting peak power demand that the government says shaves about 1.2 percentage points off annual economic growth.

Improving infrastructure, which the World Economic Forum says is a major obstacle to doing business in India, is among the toughest challenges facing Singh as he bids to revive expansion in Asia’s third-largest economy that slid to a nine- year low of 5.3 percent in the first quarter.

RBI on Hold

The Reserve Bank of India, which has blamed infrastructure bottlenecks among others for contributing to the nation’s price pressures, yesterday refrained from cutting interest rates.

Indian consumer-price inflation was 10.02 percent in June, the fastest among the Group of 20 major economies, while the benchmark wholesale-price measure is more than 7 percent.

The last time the northern grid collapsed was in 2001, leaving homes and businesses without electricity for 12 hours. The Confederation of Indian Industry, the country’s largest association of companies, estimated that blackout cost companies $107.5 million.

To contact the reporters on this story: Andrew MacAskill in New Delhi at amacaskill@bloomberg.net; Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

RBI Says India Inflation Risks Significant Even as Growth Slows By Kartik Goyal - Jul 30, 2012

Indian inflation is a major challenge for monetary policy even as economic expansion remains weak, the Reserve Bank of India said.

Threats to the economy “have been amplified by decelerating global trade and domestic supply constraints,” the central bank said yesterday ahead of its rate decision in Mumbai today. At the same time, “persistent inflation limits the space for monetary policy to revive growth.”

Governor Duvvuri Subbarao faces inflation above 7 percent even with expansion at a nine-year low, curbing his scope to join a stimulus drive extending from China to Europe. Nearly all analysts in a Bloomberg News survey predict he will leave borrowing costs unchanged as a drop in the rupee, a scanty monsoon and infrastructure gaps, underscored yesterday by India’s worst power-grid failure in a decade, stoke price pressures.

“The Reserve Bank has rightly pointed out significant risks to inflation,” said Brinda Jagirdar, an economist at State Bank of India (SBIN) in Mumbai. “That leaves it with little headroom to cut rates to support growth. New Delhi has to act on fiscal tightening and accelerating reforms.”

The rupee has plunged more than 20 percent against the dollar in the past year as Europe’s debt crisis and India’s trade deficit hurt demand for the currency. It slipped 0.4 percent to 55.585 per dollar at the close in Mumbai yesterday. The BSE India Sensitive Index, down about 6 percent in the past 12 months, climbed 1.8 percent.

Remain Guarded

“Monetary policy has to continue to remain guarded against a build-up of inflationary risks as well as to sustain the growth potential,” the Reserve Bank said. “Monetary policy space needs to be created through fiscal adjustment and structural measures to improve supply conditions and boost the investment climate, so that the revival is supported in a non- inflationary manner.”

The impact of deficient rains on crops, the slide in the rupee and energy costs are among the risks that may fan price increases, the central bank said.

Subbarao raised rates a record 3.75 percentage points from March 2010 to October last year to damp inflation. He lowered the repurchase rate by 0.5 percentage point in April to 8 percent, the first reduction since 2009, before deeming inflation too high for another cut in June.

Uncomfortable Inflation

Monetary and liquidity conditions have eased in the current fiscal year that began April 1, the central bank said. It added that inflation remains “above the comfort level,” complicating policy choices. Subbarao said earlier this month that the threshold level for inflation may be about 5 percent.

The monetary authority has previously said that April’s reduction “frontloaded” a cut on the assumption the government will restrain the budget deficit and take steps to ease supply bottlenecks.

The economy may expand 6.5 percent in the year through March 2013, based on a compilation of forecasts from other organizations, yesterday’s report showed. April’s survey projected 7.2 percent growth. Inflation may average 7.3 percent, the survey said, compared with an earlier 6.9 percent estimate.

Gross domestic product climbed 5.3 percent in the three months through March, the least since 2003, hurt by a moderation in investment and a global slowdown as the impact of Europe’s turmoil fanned through the world economy.

Benchmark wholesale-price inflation was 7.25 percent in June, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China.

Monsoon Blackout

Fiscal and trade deficits and gridlock in the ruling coalition over proposed steps to liberalize the economy have set back Prime Minister Manmohan Singh’s development agenda.

The monsoon is adding to challenges. The rains, pivotal for the incomes of about 235 million farmers as well as food supply, may be 15 percent to 20 percent below average in August, according to government estimates.

More than two-thirds of India’s 1.2 billion people still live on less than $2 per day. The nation suffered its worst electricity grid failure in a decade yesterday, cutting supplies to about 360 million people and underscoring gaps in infrastructure from power to roads.

The government forecasts record borrowing of 5.69 trillion rupees ($102 billion) to plug a targeted budget gap of 5.1 percent of GDP in 2012-2013. The goal is at risk of being missed due to spending on subsidies and a shortfall in revenues, the Reserve Bank said yesterday.

Singh took charge of the finance ministry in June, vowing to revive growth after Standard & Poor’s and Fitch Ratings said they may demote India’s credit rating to junk.

All but three of 34 economists in the Bloomberg News survey said Subbarao will keep the repurchase rate unchanged at 8 percent for a second meeting today. The others forecast a reduction to 7.75 percent.

“The Reserve Bank is facing a dilemma on policy action in the current stagflation-type environment,” said Chetan Ahya, an economist at Morgan Stanley in Hong Kong. “The inflation outlook is far from being comfortable.”

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net