India to continue with rate hike

India will keep unwinding economic stimulus deployed during the financial crisis and continue raising interest rates despite uncertainty linked to euro zone’s debt woes, its finance minister said on on Friday. Pranab Mukherjee said that a deepening debt crisis in Europe could hit India’s and other emerging economies’ exports and growth, but such a risk was not stopping India from gradually reversing loose fiscal and monetary policies.

Asked whether uncertainty about the impact of Europe’s debt crisis on the global economy was a reason to hold off with further interest rate increases despite last quarter’s buoyant growth, Mukherjee said, “No, we won’t pause them.”

RBI raised rates in March and April by 25 basis points and signalled more hikes would follow, when it last met for a regular quarterly policy review in April. However, recent market volatility and worries that Europe’s efforts to rein in debt will sap global growth, cast doubt on the scope of monetary tightening by major central banks.

Such worries also gave rise to suggestions that major emerging markets economies, such as China, India, Brazil and Russia, should help sustain global recovery by delaying the exit from loose policies put in place during the global downturn.

Mukherjee, however, said India would continue to consolidate its finances and underscored the contrast between the relative fiscal health of emerging economies and debt-laden euro zone members. “You need fiscal prudence and in the developing countries, we are doing so.”