Busan (South Korea) : India will keep unwinding economic stimulus deployed during the financial crisis and continue raising interest rates despite uncertainty linked to the euro zone’s debt woes, its finance minister said on Friday.

Pranab Mukherjee told Reuters Insider television 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."

The finance minister was speaking on the sidelines of a meeting of Group of 20 finance ministers and central bankers in this South Korean port city.

Reserve Bank of India (RBI) raised rates in March and again April by 25 basis points and signalled more hikes would follow, when it last met for a regular quarterly policy review in April.

India’s benchmark 10-year bond yield rose as much as 2 basis points from the day’s lows to 7.57% after Mukherjee’s comments to Reuters.

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 that Asia’s third-largest economy 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."

Mukherjee said that India, which has pumped an equivalent of 3% of gross domestic product into its economy to shield it from the global crisis, planned to withdraw that stimulus next year.

“I hope to have next year a total exit policy."

Emerging economies not immune from Europe woes

The Indian economy grew by 8.6% in the March quarter from a year earlier, in yet another sign that the world’s major emerging economies have been little affected by Europe’s troubles.

However, Mukherjee said a deeper, protracted crisis would not leave those economies unscathed.

“If the larger Europe and the entire euro zone is affected by this crisis and the recovery process is slowed down, naturally it will affect both exports from the developing countries ... and the flow of FDI (foreign direct investment)," he said.

“We do hope the crisis will be resolved sooner rather than later."

Wholesale prices, the RBI’s most closely watched gauge of inflation, eased slightly in April to 9.6%, but are not far from 10.1% seen in February, which was the highest since October 2008.

Mukherjee said Prime Minister Manmohan Singh’s target of bringing inflation down to 5-6% by the end of 2010 is realistic.

“The inflationary pressure on food items has started coming down and it reached as high as 21 percent in the month of December but now it is around 15%, and with the good weather conditions and good rainfalls I do hope that the reason for huge inflationary pressure on food items will not be there," he said.

While many economists and investors in India had expected the RBI to raise rates once more before its next quarterly review on 27 July, the likelihood of such an off-cycle move has waned in recent weeks, some observers have said.

“These statements mean that the RBI and the government will be guided more by domestic developments than by what is happening in Europe, and they are confident that whatever turbulence will happen in the financial markets will be managed," said Rupa Rege Nitsure, chief economist at Bank of Baroda.