India Unexpectedly Cuts Reserve Ratio as BRICs Act on Growth
Jan. 24 (Bloomberg) -- India's central bank unexpectedly cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signaled future interest-rate cuts, joining BRIC nations in aiding growth.
The Reserve Bank of India reduced the cash reserve ratio to 5.5 percent from 6 percent, it said in a statement in Mumbai today. The move would add around 320 billion rupees into commercial banks, it said. The decision was predicted by three of 21 economists in a Bloomberg News survey, with two foreseeing a quarter-point cut and the rest no change. The central bank left the benchmark repurchase rate at 8.5 percent for a second month.
Brazil, China and Russia have either cut borrowing costs or reduced lenders' reserve requirements in recent weeks as the debt crisis in Europe saps global expansion. While India's inflation, stoked by rupee weakness, is the fastest in the group, it eased to a two-year low last month, giving Governor Duvvuri Subbarao more scope to inject cash into an economy that grew the least since 2009 in the third quarter.
"With the liquidity deficit becoming worrying, today's move is aimed at easing the cash crunch but they are still concerned about inflation which is limiting policy options," Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd., said before the release. The RBI may start cutting the policy rate in March, she said.
The BSE India Sensitive Index extended gains, rising 0.8 percent to 16,880.17 at 11:04 a.m. in Mumbai. India's rupee, which has surged about 6.5 percent against the U.S. dollar this year, advanced 0.1 percent to 50.0375. The currency is Asia's best performer this year after sliding 16 percent in 2011.
The yield on the 8.79 percent note due November 2021 fell four basis points to 8.09 percent, according to the central bank's trading system.
The Reserve Bank today cut India's growth forecast to 7 percent in the year through March from the 7.6 percent predicted in October. It kept the inflation estimate at 7 percent, according to today's statement.
The reduction in the reserve ratio, effective Jan. 28, aims to "address structural pressures on liquidity in a way" consistent with the prevailing monetary stance, the RBI said. The persistence of "tight liquidity conditions" could disrupt the flow of credit and further exacerbate growth risks, it said.
Inflationary threats make it "premature" to begin reducing the policy rate, it said. These risks include the budget deficit, the rupee's fall and suppressed inflation from the domestic prices of some administered products such as coal, it said.
At the same time, the reserve-ratio cut "can be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them," the central bank said.
All 21 respondents in Bloomberg's survey predicted no change in the repurchase rate today.
The Reserve Bank has added 718.8 billion rupees into the banking system since the start of November by purchasing government securities from lenders, resuming open market operations after 10 months to alleviate the cash shortage and support credit growth.
India's benchmark wholesale-price inflation rate was 7.47 percent in December. By comparison, consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China last month.
Brazil on Jan. 18 cut its benchmark rate by half a point for a fourth straight policy meeting to shield the economy from Europe's debt woes. Russia last month unexpectedly reduced its benchmark rate. China in November cut the amount of cash that banks must set aside as reserves for the first time since 2008.
Higher borrowing costs in India are hurting demand. Maruti Suzuki India Ltd., maker of almost half the cars sold in the country, said Jan. 2 that its local sales for the April to December period declined 17 percent.
Commercial banks sanctioned 339 billion rupees of loans in the three months through September, a 77 percent drop from the same quarter in the previous year, according to the central bank.
"Industrial growth remains fragile and the RBI should reduce interest rates as soon as possible to revive investment," Harsh Mariwala, chairman of Marico Ltd., an Indian maker of hair oils, said before the release. "India also needs aggressive reforms at the moment to bolster the economy."
Prime Minister Manmohan Singh is under pressure to boost expansion following a struggle to attract more foreign investment, street protests against inflation and corruption allegations against officials.
His government faces at least five regional elections starting this month, including one in Uttar Pradesh, India's most populous state. The polls will offer an indication of support two years before national elections are due.
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