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Brics no longer safe haven for investors

Brics no longer safe haven for investors
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First Published: Fri, Jun 13 2008. 12 13 AM IST
Updated: Fri, Jun 13 2008. 12 13 AM IST
New Delhi: India joined Brazil, China and Russia in raising borrowing costs to combat inflation, adding to the risk of a slowdown in the world’s fastest-growing economies.
The Reserve Bank of India, or RBI, increased on Wednesday the repurchase rate to 8% from 7.75%, joining its fellow members of what Goldman Sachs Group Inc. terms the Bric nations in taking steps to cool their economies within the past week. Brazil, where consumer prices have surged to a three-year high, and Russia both raised rates, while China ordered lenders to set aside more reserves.
The crackdown suggests that the four nations, which the International Monetary Fund says accounted for almost half of the global expansion last year, can’t be counted on to provide a safe haven for investors battered by the doubling of crude oil prices over the past 12 months, turmoil in the credit markets and the US economic slowdown.
Net private investment in developing countries surged by $269 billion (Rs11.5 trillion) last year to a record $1.03 trillion, with the bulk of the money going to the Bric countries, according to the World Bank. It forecasts those investment flows will drop to about $800 billion by next year.
Global economic growth will probably slow to 2.7% this year from 3.7% in 2007, checked by spiralling food and energy prices and tighter credit, the World Bank said in its Global Development Finance report.
“It doesn’t bode well for global growth if central banks in emerging markets have to be raising rates at a time when the US and European economies are slowing,” said Martin Schulz, manager of the Allegiant International Equity Fund in Cleveland, US.
China’s expansion is expected to cool to 9.4% from 11.9% and Brazil’s to 4.6% from 5.4%. Russia’s economy may grow 7.1% from 8.1% in 2007, while India’s may ease to 7% this year, the report said.
India may see a “a tightening bias in monetary policy in the near term,” said Tushar Poddar, an economist at Goldman in Mumbai.
Indian shares trading in the US fell, sending the Bank of New York India ADR Index to a two-month low.
China’s central bank told lenders on 7 June to set aside more of their deposits as reserves to stop cash in the financial system from stoking price gains. Brazil’s central bank raised the benchmark lending rate on 4 June a half percentage point, while Russia raised interest rates by 25 basis points on 9 June.
RBI has raised the repurchase rate eight times in the past two and a half years. It has also lifted the cash reserve ratio — the proportion of deposits lenders must set aside — seven times since December 2006 to cool inflation.
US Federal Reserve chairman Ben S. Bernanke said on 9 June he’ll “strongly resist” any surge in inflation expectations, while European Central Bank president Jean-Claude Trichet reiterated he may raise rates as soon as next month.
“About a month ago, the central banks were struggling with the idea of prioritizing growth versus inflation,” said Shuchita Mehta, a Mumbai-based economist at Standard Chartered. “Given the recent surge in global oil prices, fighting inflation has become a clear priority now with central banks around the world.”
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Sumit Sharma in Mumbai contributed to this story.
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First Published: Fri, Jun 13 2008. 12 13 AM IST