Indian growth slows to four-year low as rupee dims outlook

Indian rupees (Source: Bloomberg) Indian rupees (Source: Bloomberg)

India’s economy expanded at the weakest pace since 2009 last quarter, adding pressure on Prime Minister Manmohan Singh to stem a plunge in the rupee that led the central bank to raise interest rates.

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

The rupee has slumped 16% 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% to 65.705 at the close in Mumbai. The RBI two 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%. The yield on the 7.16% bond due May 2023 fell to 8.60 from 8.77% yesterday.

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% in the year ending March 2014, BNP said. Average growth in the past 10 years is about 8%.

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% in the second quarter from a year earlier, from a 3.8% pace in previous three-month period, today’s report showed. Government spending jumped 10.5%, while investment slid 1.2%.

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