Western debt crisis fuelling inflation in India: Pranab
13 Sep 2011
The "lengthening shadow" of the debt crisis in Europe is a cause of concern for the Indian economy, finance minister Pranab Mukherjee said today, as if to divert blame for runaway inflation to forces outside the administration's control.
"Advanced economies, the Eurozone and the US, are seized with sovereign debt problems. This is making financial markets nervous," Mukherjee told a conference organised by the Indian Council for Research on International Economic Relations (ICRIER) in New Delhi.
"Even the tepid global economic recovery that we have seen so far is stalling," he said.
Fears of a Greek debt default are strongly affecting Europe's banking sector and have rattled world markets, adding to the domestic concerns of Indian policymakers struggling with high inflation and an economic slowdown, Mukherjee said.
Mukherjee said central banks in emerging economies have been forced to raise interest rates repeatedly as they battle high inflation, exposing them to volatile capital flows.
"Large and volatile capital flows to emerging markets can be destabilising as they lead to high exchange rate volatility, and in some cases make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden and large-scale flight of international capital," he told the conference.
India's GDP growth declined to 7.7 per cent in the April-June 2011 quarter, the slowest in six quarters. India's industrial output growth also slumped to 3.3 per cent in July, the slowest in two years.
The finance ministry will report August inflation on Wednesday, and the numbers are expected to influence the central bank's decision on whether or not to raise rates on Friday.
The Reserve Bank of India has raised rates 11 times in the past 15 months to tame stubbornly high inflation, which stood at 9.22 per cent in July.
The danger that a Greek debt default could roil bigger European economies was underlined on Monday as heavily exposed French banks' shares plunged and investor confidence in the eurozone's ability to surmount a sovereign debt crisis ebbed.
