Slowest India Growth Since 2009 Pressures Singh to Support Rupee

Photographer: Dhiraj Singh/Bloomberg

The rupee has slumped 16 percent versus the dollar this year as India’s record current-account deficit made it vulnerable to an outflow of capital from emerging markets, spurred by the prospect of reduced U.S. monetary stimulus. Close

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Photographer: Dhiraj Singh/Bloomberg

The rupee has slumped 16 percent versus the dollar this year as India’s record current-account deficit made it vulnerable to an outflow of capital from emerging markets, spurred by the prospect of reduced U.S. monetary stimulus.

India’s slowest economic expansion since 2009 adds pressure on Prime Minister Manmohan Singh to stem a slide in the rupee that forced the central bank to raise interest rates.

Gross domestic product rose 4.4 percent in the three months through June from a year earlier, compared with 4.8 percent in the prior quarter, the Statistics Ministry said in New Delhi yesterday. The median of 44 estimates in a Bloomberg News survey was for a 4.7 percent gain.

The rupee has slumped 16 percent versus the dollar this year as India’s record current-account deficit made it vulnerable to an outflow of capital from emerging markets, spurred by the prospect of reduced U.S. monetary stimulus. The Reserve Bank of India raised rates in July to support the currency and contain inflation, imperiling economic expansion even as Singh pledges to revive investment.

“The government is going to struggle to turn around the economy until it gets the deficit, consumer-price inflation and the exchange rate under control,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “This may take some time, and growth is at risk in the meantime.”

The rupee, which reached a record low of 68.845 per dollar on Aug. 28, climbed 1.4 percent to 65.705 at the close in Mumbai. The RBI three days ago said it will supply dollars to the largest oil importers to cool foreign-exchange demand. The S&P BSE Sensex index rose 1.2 percent. The yield on the 7.16 percent bond due May 2023 fell to 8.60 from 8.77 percent on Aug. 29.

Capital Outflows

Nations from Indonesia to Brazil are trying to bolster their currencies as foreign investors exit on concern the Federal Reserve will taper $85 billion a month of debt purchases that boosted the capital circulating in the global economy.

The RBI is set to sustain and may even extend recent monetary tightening, according to BNP Paribas SA. While a good monsoon is helping farm output, other risks mean GDP expansion may dip to 3.7 percent in the year ending March 2014, BNP said. Average growth in the past 10 years is about 8 percent.

The RBI has raised the marginal standing facility and bank rates and capped cash injections into the banking system since July, while keeping the benchmark repurchase rate unchanged.

Private consumption growth eased to 1.6 percent in the second quarter from a year earlier, from a 3.8 percent pace in previous three-month period, yesterday’s report showed. Government spending jumped 10.5 percent, while investment slid 1.2 percent.

Foreign Reserves

Rupee weakness threatens to stoke consumer-price inflation of almost 10 percent, the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

The drop has also revived memories of India’s 1990s crisis, when the nation needed an International Monetary Fund loan as foreign reserves waned. Singh said this month growth will speed up and India won’t face a repeat of that turmoil.

India’s reserves of about $278 billion are adequate near term, Moody’s Investors Service said Aug. 19. Fiscal policy remains the weakest aspect of Asia’s No. 3 economy, it said.

The RBI must boost currency holdings to anchor the rupee, and options include a sovereign-bond issue or deposits to tap India’s diaspora, according to Bank of America Merrill Lynch.

Singh’s coalition, beset by graft scandals and seeking support before polls due by May, won parliamentary backing this week for bills providing cheap grains to the poor and assuring fairer terms for farmers when companies buy their land.

Singh’s Agenda

Legislation to allow increased foreign investment in the pensions and insurance industries and simplify taxes is pending. Opposition protests over graft have repeatedly disrupted parliament for more than two years.

The government has tried since 2012 to tackle deficits, woo inflows, speed up construction projects and avert a credit-rating cut. The steps range from higher taxes on gold imports to more liberal foreign-direct investment rules.

“The macro-stabilization process which should support the value of the rupee is under way,” Singh said in parliament in New Delhi yesterday. “As the fruits of our efforts materialize, currency markets will recover.”

The government predicts the current-account imbalance may narrow to about $70 billion this fiscal year and targets a budget gap of 4.8 percent of GDP.

Cooling demand in the nation of 1.2 billion people, about two-thirds of whom live on less than $2 per day, is hampering corporate expansion. Maruti Suzuki India Ltd., India’s largest carmaker, has delayed a plan to build a plant in Gujarat state.

India’s slowdown contrasts with more resilient expansion in neighbors such as China, which grew 7.5 percent last quarter.

The South Asian nation’s vulnerability is being “clearly exposed by an unfavorable external environment,” said Eswar Prasad, who teaches economics at Cornell University in New York.

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

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

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