Wider euro debt crisis would hurt India

India's economy would be hurt should the sovereign debt crisis that originated in Greece spread in Europe, Finance Minister Pranab Mukherjee said.

"If the whole of Europe is affected by the debt crisis it will be harmful to us," Mukherjee said yesterday in an interview in Busan, South Korea, where he is attending a meeting of finance officials from the Group of 20 nations.

The European Union is India's biggest overseas market, accounting for a fifth of the nation's merchandise exports. The South Asian nation, which opened its market to foreign investors in 1991, has become vulnerable to slowdowns and financial crises abroad as exports play a bigger role in the economy.

Trade represented 35 per cent of gross domestic product for the year ended March 31, 2008, up from 21 per cent in 1997-98, the year of the Asian financial crisis, according to the central bank.

India's economic growth accelerated to 8.6 per cent last quarter, the fastest pace after China among the world's major economies.

Growing consumer demand is stoking inflation, with the benchmark wholesale-price index climbing 9.59 per cent in April.

Inflation is "an area of concern, but I'm not pressing the panic button," Mukherjee said. "There is a disturbing signal as core inflation is likely to go up."

Core inflation

Core inflation, which excludes food and fuel prices, is currently close to 6 per cent from 1.8 per cent at the end of 2009, Kaushik Basu, chief economic adviser in the finance ministry, said on Thursday.

The Reserve Bank of India has raised interest rates twice since mid-March by a quarter percentage point each time. The bank's benchmark reverse-repurchase rate is 3.75 per cent.

Last month, Subir Gokarn, the deputy governor in charge of monetary policy at the Reserve Bank, said the central bank will pursue a "cautious" pace of monetary tightening because of risks to growth posed by Europe.

The G20 is meeting at a time when the US and Europe are split on the scale and timing of increases in bank-capital requirements, which have been under discussion since governments were forced to bail out lenders, an official from a G20 government said.

Countries such as the US, whose economies are largely financed by markets, want banks to be required to hold more assets on their balance sheets to buffer against future crises, the official told reporters on condition he not be named.

Policy makers in continental Europe, where banks provide more financing, are concerned that too-high reserves risk choking off growth, the official said.

Morgan Stanley cuts Asian currency forecasts

Morgan Stanley lowered its forecasts for Asian currencies, including the South Korean won and the Indian rupee, as Europe's debt crisis saps demand for the region's exports.

"A weak euro and fiscal drag in euroland will impart weaker external-demand conditions for Asian currencies ex-Japan," analysts Stewart Newnham and Yee Wai Chong wrote in a report on Thursday. "We are mindful that if China slows too, this would further soften the regional currency outlook."

South Korea's won will likely strengthen to 1,175 per dollar by year-end, compared with an earlier forecast of 1,050, the report said. India's rupee may climb to 46 and the Singapore dollar to S$1.39 by end-December. Previous estimates were at 43.50 and S$1.32, according to the US bank.