India Can Weather ‘Negative Sentiments,’ Mukherjee Says; Futures Decline

India will be able to sustain its economic growth 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 at an event in New Delhi on Aug. 6. “Our markets have the capacity to withstand the negative sentiments affecting the external world.”

Indian stocks and the rupee may extend losses today after Standard & Poor’s last week cut the U.S.’s AAA rating for the first time, analysts at Edelweiss Securities Ltd. and the National Institute of Public Finance and Policy said. Mukherjee said India’s challenge is to tame inflation, contrasting with overseas investor concerns about a global recession. S&P CNX Nifty Index futures sank as much as 2.9 percent in Singapore.

“Markets will likely fall after the downgrade,” N.R. Bhanumurthy, an economist at the National Institute, a New Delhi-based economic research group, said yesterday. “India’s growth prospects are strong, but the concern is the risk of a downturn in the developed world.”

Mukherjee said there was “some recovery” in Indian markets last Friday, which is a “testimony to our capacity for resilience.”

The Bombay Stock Exchange Sensitive Index, or Sensex, lost 2.2 percent on Aug. 5 to 17,305.87, the lowest since June 11, 2010. SGX S&P CNX Nifty Index futures for August delivery declined 1.6 percent to 5,139 at 9:21 a.m. in Singapore. The futures are derived from the 50 stocks on the underlying Nifty Index, which fell 2.3 percent to 5,211.25 on Aug. 5.

Rupee, Bonds

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.

“Markets will trade choppy, nervous and volatile on account of the downgrade,” said Vikas Khemani, president of Edelweiss Securities Ltd., a unit of the country’s largest listed brokerage. “It’s a global macro development that can curb liquidity and heighten risk aversion across the world.”

Still, for India, an increase in investment rates “reminiscent of the high-growth East Asian economies” and the young working-age population in the country, where over half the people are in their twenties, are factors that will spur growth, Mukherjee said.

“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.”

Company Investment

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.

Mukherjee Aug. 6 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 Aug. 5 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.

Moody’s, Fitch

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 ending 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.

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.

Europe’s Stance

Meanwhile, policy makers among developed European and Asian nations 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.

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.”

‘Irreversible’ Changes

He said the changes India started in 1991 to open the economy to foreign investors and cut bureaucracy are “irreversible” and reiterated the finance ministry’s plan to narrow its budget deficit to a four-year low of 4.6 percent of gross domestic product in the year through March.

A panel of Indian ministers Aug. 5 approved freeing urea prices from government control, said a minister, who declined to be identified before the decision is made public, signaling government efforts to trim subsidies.

Mukherjee said Aug. 6 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.

India may not need to raise borrowing costs further if growth in the U.S. slows and helps lower global commodity prices, R. Gopalan, secretary of economic affairs at India’s finance ministry, said in Chennai on Aug. 6.

“If what has happened in the U.S. pulls down the growth and reduces the prices of commodities in the international market and that comes into our economy as lower price levels, perhaps we may not need a hike,” Gopalan told reporters. “It is too early to make any estimation about it.”

He said India’s central bank will meet in six weeks to “analyze the situation and accordingly take a view.”

India’s next monetary policy announcement is scheduled for Sept. 16.

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

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