Bloomberg News

Mukherjee Calls for Focus on Growth Before India Rate Decision

December 14, 2011

Dec. 14 (Bloomberg) -- India must focus on boosting economic growth, Finance Minister Pranab Mukherjee said ahead of the central bank’s monetary policy meeting later this week.

“We must turn our attention now to reviving growth as quickly as possible,” Mukherjee said at an event in New Delhi today after a report this week showed industrial production shrank in October for the first time in more than two years. The slump is “partly a reflection of global trends, but our own fight against inflation has also taken a toll on investments by our corporations,” he said.

India’s inflation slowed in November to the lowest level in a year, boosting the Reserve Bank of India’s scope to pause its record interest-rate increases in the Dec. 16 policy meeting. Asian policy makers from China to Indonesia have either cut borrowing costs or kept them on hold to shield their economies as Europe’s debt crisis threatens to trigger a global slump.

“Indeed, there is indication that even the tepid economic recovery that we have seen so far in the advanced economies is stalling,” Mukherjee said. “Unemployment in these economies never quite recovered from their crisis highs. The relatively robust recovery in emerging market economies is also beginning to falter.”

The yield on the 8.79 percent government bond due November 2021, which declined 25 basis points this month, rose eight basis points, or 0.08 percentage point, to 8.49 percent at the close in Mumbai. The rupee weakened 0.9 percent to 53.7150 per dollar. The BSE India Sensitive Index dropped 0.8 percent.

Slowing Inflation

India’s benchmark wholesale-price index rose 9.11 percent in November from a year earlier, the commerce ministry said in New Delhi today, compared with a 9.73 percent jump in October.

Reserve Bank Governor Duvvuri Subbarao has raised the repurchase rate by 375 basis points in 13 moves since the start of 2010 to tame prices. The round of increases is the fastest since the central bank was established in 1935, Bloomberg data show.

Consumer demand has begun to wane as a result of higher borrowing costs.

Output at factories, utilities and mines fell 5.1 percent in October from a year earlier, according to India’s statistics office. The decline is the first since the 1.8 percent drop in June 2009.

The central bank said on Oct. 25 that its monetary tightening will help curb inflation and that the likelihood of a rate action in the December policy meeting is “relatively low.”

Rupee’s Drop

Even so, the rupee’s slump of about 17 percent this year, Asia’s worst performance, adds to the cost of imported goods and is keeping India’s inflation higher than in the so-called BRIC nations.

Consumer prices rose 6.6 percent in Brazil, 6.8 percent in Russia and 4.2 percent in China last month.

The rupee will reverse its declining trend if capital flows from overseas pick up, said Chakravarthy Rangarajan, a top economic adviser to Prime Minister Manmohan Singh.

“I think the behavior of the rupee is a reflection of the current account deficit and the extent of capital flows,” Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said today. “If capital flows pick up during the year, what we are now seeing could also get reversed.”

A slowdown in external demand has led to a drop in export growth in recent months and the current account deficit has widened to about 3 per cent of GDP, Mukherjee said.

The currency briefly pared losses after Singh said in an interview with Bloomberg News that he expects to succeed in his push to open India’s retail market to foreign companies after regional elections conclude by the end of March 2012. Shoppers Stop Ltd., India’s second-largest retailer, snapped five straight days of losses in Mumbai trading after Singh’s pledge.

The government on Dec. 7 suspended a decision to allow overseas retailers including Wal-Mart Stores Inc. to open stores amid protests by the opposition and some of its allies.

--Editors: Cherian Thomas, Suresh Seshadri

To contact the reporter on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net

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


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