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Mumbai: Slackening demand, volatile markets and a lack of credit in Europe are beginning to squeeze emerging markets, including India, but not to an extent of derailing robust economic performance, a report by Ernst and Young (E&Y) has predicted.

The consultancy firm’s Rapid Growth Markets Forecast, released on Saturday, covers emerging Asian markets, sub-Saharan Africa, West Asia, North Africa and Latin America. It predicts that these markets are expected to grow collectively by 5.3% in 2012.

India is expected to grow at 6.8% in 2012, compared with a forecast of 8% in the previous and the first Rapid Growth Markets Forecast released in October.

“While growth in the current year has moderated, India’s medium- to long-term growth prospects remain intact," said Farokh Balsara , partner and India markets leader at E&Y.

According to the forecast, growth in India is expected to accelerate strongly in 2013 at 9.5%, as the global economy recovers, boosting exports and as the impact of previous interest rate tightening wanes and investment recovers. An improvement in both domestic and external demand will feed the recovery in growth, it said.

While growth in the emerging markets will continue to be the envy of advanced economies, in the near term, they are showing the strains from the fall in demand from the euro zone, as well as the buffeting financial markets and business confidence received in the past few months. As a result, growth in 2012 is expected to be lower than the earlier forecast.

However, these markets will continue to contribute nearly half of the world’s growth over the next three years, according to the latest study.

The slowing in growth across the emerging markets reflects several factors, including the euro zone crisis, which will remain the most damaging until it is resolved. The business impact of an escalation of the crisis would be particularly serious for exporters in these markets who are exposed to significantly weaker demand from Europe.

The study also observed a reversal in portfolio flows since July as investors became increasingly risk-averse. Threats to liquidity and lending by European banks with a wide global reach are particularly disquieting for these markets.

Banks are selling assets and cutting back on loans under pressure to strengthen their capital, which is weakening financial flows into and within these regions, with potentially depressive impacts not only on business operations but also business investment.

“The immediate impact has been currency depreciations, most notably in Brazil and India. The sharp depreciation of the Indian rupee led to increased inflationary pressure on the economy," says the forecast.

ch.unni@livemint.com

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