Thaindian News

New Delhi, Sep 13 (IANS) Financial markets are getting “nervous” due to high inflation, slowdown in economic growth and aggravating sovereign debt problems in the US and European economies, Finance Minister Pranab Mukherjee said Tuesday.

“Advanced economies, the Eurozone and the US, are seized with sovereign debt problems. This is making financial markets nervous,” Mukherjee said at a conference organised by the Indian Council for Research on International Economic Relations (ICRIER) here.

He said growth in most advanced economies had declined in the second quarter of 2011 and emerging markets were “witnessing a combination of moderation in growth and rising inflation”.

“Even the tepid global economic recovery that we have seen so far is stalling,” he said.

India’s GDP growth declined to 7.7 percent in April-June 2011 period, slowest in six quarters. India’s industrial output slumped to 3.3 percent in July, the slowest growth in two years.

Growth has declined across the world leading to slump in the global stock markets.

Mukherjee emphasised on the need for a collective effort to overcome the economic crisis situation.

The finance minister said aggressive monetary tightening by the central bank was also hurting growth.

“Emerging markets recovered quickly from global slowdown, but are facing elevated commodity prices, inflation, moderating growth and volatile capital flows all at once,” he said.

“Central banks have been forced to raise policy rates repeatedly, potentially compromising growth in the short-term,” he added.

The Reserve Bank of India (RBI) has hiked its policy rates 11 times since March 2010 to curb inflation. However, despite an aggressive monetary tightening inflation has remained stubbornly high, near double-digit, much above the central bank’s comfort level of 4-5 percent.

As per the latest official data, the headline inflation for July was 9.2 percent and food inflation was 9.22 percent for the week ended Aug 27.

The finance minister said the central bank was confronted with problem of curbing inflation, keeping growth high and managing capital inflow.

“They are also confronted with the impossible trinity. While raising rates may help stabilise growth, it may also invite more capital inflows,” he said.

Mukherjee said managing capital flows was crucially important for emerging economies like India.

“Large and volatile capital flows to emerging markets can be destabilising as they lead to high exchange rate volatility and, in some cases, make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden or large-scale flight of international capital,” he said.