MUMBAI (Reuters) - Indian authorities slashed banks' reserve requirement on Friday and pledged more funds to ease a credit squeeze that drove short-term borrowing rates to 19-month highs and forced the government to scrap a bond sale.
The Reserve Bank of India (RBI) cut the cash reserve ratio by 1.5 percentage points to 7.5 percent, saying the move would free up around 600 billion Indian rupees ($12.38 billion) in funds. Finance Minister Palaniappan Chidambaram said the authorities would take further steps to provide more funds to the banking sector.
"We will take steps to infuse liquidity because we recognise that the flow of credit smoothly and efficiently through the system is vital to the stability of the financial system," he told Indian television.
The Reserve Bank of India sprung into action after overnight rates soared to as much as 23 percent in the money market when it reopened following a holiday on Thursday. The rupee hit an all-time low and the main stock index plunged more than 9 percent, joining a global selloff on recession fears despite unprecedented coordinated action by the world's leading RBIs to stave off a crisis.
Tight liquidity also prompted the government to call off an auction for $2 billion worth of government bonds.
A global round of interest rate cuts this week failed to cap overnight rates, which more than doubled from Wednesday's closing levels of around 10 percent.
"This is a short-term reaction to a huge panic crisis and a possibility of a run in the rupee. I think they will try their best to prevent the rupee from breaching 50 per dollar," said Abheek Barua, chief economist at HDFC Bank in New Delhi.
The rupee hit an all-time low of 49.30 per dollar in early trade, bringing this year's losses to 20 percent before it regained some ground with the help of state-run banks selling dollars and the cash reserve cut. The reserve easing also helped India's battered stocks recoup some of the early losses.
CLOSE WATCH
The finance minister did not elaborate on possible liquidity injections, but said market conditions should improve once government wins parliamentary approval for spending. Several spending measures, including a waiver on farm loans, aimed at propping up the economy await lawmakers' go-ahead.
Finance Secretary Arun Ramanathan also said in a statement that the RBI has assured the government it was keeping a close watch on the market and would take appropriate steps.
The government set up a panel, which includes representatives from the RBI, to assess the liquidity problem and report back within a week, he said.
The RBI also sought to soothe investors' frayed nerves, blaming the money market squeeze squarely on international conditions and assuring them that the Indian economy was in good health.
"It is important to note that the macroeconomic fundamentals of the Indian economy are strong and resilient and that India's financial system is sound, well-capitalised and well-regulated," it said.
Analysts were divided whether the RBI would follow the cut in reserve ratio with a reduction in its interest rates.
Some say high inflation limits the scope for monetary easing.
India's wholesale price index -- its main inflation gauge -- rose 11.8 percent in 12 months to Sept. 27, less than in the previous week, but still far away from the 7 percent level the RBI aims to achieve by the end of the current fiscal year ending in March 2009.
Others say a round of interest rate cuts worldwide, global recession fears and signs that Asia's third largest economy was cooling, have shifted the policy focus from battling inflation to providing enough credit to grease the wheels of the economy.
In another sign that the Indian economy was losing momentum, annual industrial output growth slowed to 1.3 percent in August, its lowest in nearly 10 years and much below a revised 7.4 percent expansion in July and market forecasts.
Output growth has slowed from double-digit levels seen last year as the RBI's monetary tightening dampened demand in the economy. The RBI raised rates three times this year bringing its benchmark lending rate to a seven-year high of 9 percent, but has kept it on hold since late July in the face of turmoil in global financial markets and slackening economic growth at home.
No comments:
Post a Comment