Despite Impressive Growth, Inflation Remains a Concern for India

| About: India Fund (IFN)

By Elliot Turner

India reported its strongest GDP number since the global financial crisis began, posting an 8.8% growth rate for the second quarter. This checked in 20 basis points higher than the first quarter’s 8.6%. The 8.8% figure was right in-line with analyst estimates, and demonstrated the impressive organic growth in this third largest Asian economy behind China and Japan.

While growth has been impressive, inflation remains a concern for the country. Although India boasts a burgeoning global services and IT sector, exports account for less than 20% of the country’s GDP. As a result, strong domestic growth puts upward pressure on prices. Car sales in particular demonstrated this effect, rising more than 30% in July alone. As domestic wages rise, factories are operating at, or near capacity. This led to an 11.6% increase in industrial output.

In response to the growing inflationary pressures, India has been undertaking a multi-pronged approach to stabilizing domestic prices: the Reserve Bank of India (RBI) already raised interest rates four times this year, with the latest instance coming barely more than one month ago, and the Indian government is in the process of cutting its budget as a percentage of GDP from 6.5% to 5.5% in the coming year. With monetary and fiscal policy moving in concert, India is attempting to walk a fine line between maintaining its impressive growth rate and slowly cooling inflationary pressures.

During the second quarter, the Bombay Stock Exchange’s Sensex Index has been forging new 52-week highs while other global equity markets–including India’s Asian and BRIC peer, China–experienced a good deal of pain. Investors cheered as the government hinted that it may consider loosening up foreign capital restraints in order to increase access to global capital markets.

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Sensex remains in breakout territory.

Disclosure: Long IFN

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Tagged: , Closed-End Fund - Foreign, India
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