The Reserve Bank of India (RBI) on Saturday unexpectedly cut its main short-term lending rate for the second time in as many weeks to ease a growing cash squeeze, spur faltering economic growth and fend off damage from the global financial crisis.
Analysts said the surprise RBI move, coming just a week after it left rates unchanged at a policy review, showed its concern that strains on Asia's third-largest economy were quickly becoming more severe.
"These actions were necessary (and had) to be taken on the liquidity front. And with call rates above 20 percent the situation was getting worse," said Vikas Agarwal, strategist at JP Morgan.
"The only question at this point of time which arises is why this was not taken at the time of the policy review last week and the only explanation is they did not anticipate the extent of the liquidity crunch," Agarwal added.
Policymakers around the world have slashed interest rates in recent weeks and injected huge amounts into their banking systems to try to combat the spillover effects of the global financial crisis, which is causing credit markets to freeze up and threatens to plunge the world economy into recession.
Analysts said the surprise move meant concerns over growth and cash tightness overrode inflationary issues but bankers said they would adopt a wait-and-see stance before deciding on lowering their lending and deposit rates.
V. Vaidyanathan, executive director at ICICI Bank the country's second biggest lender told CNBC-TV 18 the move was a welcome step to tide over the cash crunch but it won't rush into interest rate cuts immediately.
The RBI cut the repo rate or its main short-term lending rate by 50 basis points to 7.5 percent and banks' cash reserve requirements by 100 basis points to 5.5 percent.
SLOWING GROWTH
It also cut banks' bond reserve requirements by 1 percentage point to 24 percent of their deposits with effect from November 8, 2008, the central bank said in a notification posted on its website. www.rbi.org.in.
"The global financial turmoil has had knock-on effects on our financial markets; this has reinforced the importance of focusing on preserving financial stability," the central bank said.
The cut in its repo rate will take effect from Nov. 3.
The cut in banks' cash reserve requirements will take effect in two steps -- one from the fortnight beginning Oct 25 and the second from Nov 8 and will release 400 billion rupees ($81 billion) into the banking system.
Piyush Wadhwa, senior vice president, ICICI Securities said the 10-year bond yield could spike up by 5-10 basis points on Monday as result of the central bank move asking lenders to keep less of their deposits in federal debt but yields may ease in the medium term.
On Friday, the 10-year bond yield ended down 1 basis point at 7.50 percent.
India's economy has grown at or above 9 percent for the past three fiscal years, but is expected to grow by less than 8 percent this year as the global slowdown reduces exports. Industrial output grew at an annual rate of just 1.3 percent in August.
Rajeev Malik, economist at Macquarie Securities said the firm was cutting the country's growth estimates for the current year ending in March to 7.2 percent from the previous 7.5 percent due to the global market turmoil.
Overnight cash rates soared to a three-week high of 21 percent on Friday after outflows towards treasury bills drained cash from the system and banks scrambled to arrange funds for a the bond auction which took place earlier in the day.
The RBI move to cut rates on Saturday follows a 100 basis point cut in its main short-term lending rate early last week ahead of its scheduled review on Oct 24.
Showing posts with label CRR. Show all posts
Showing posts with label CRR. Show all posts
Saturday, November 1, 2008
Friday, October 10, 2008
RBI cuts reserve ratio, scraps bond as markets tank
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.
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.
Monday, October 6, 2008
RBI cuts CRR by 0.5%
The Reserve Bank of India on Monday cut the Cash Reserve Ratio (CRR) rate by 0.5 per cent to 8.5 per cent.
The central bank's move will infuse Rs 20,000 crore (Rs 200 billion) into the markets.
The RBI said in a statement: 'On a review of the current liquidity situation in the context of global and domestic developments, it has been decided to reduce the Cash Reserve Ratio (CRR) by 50 basis points to 8.5 per cent of net demand and time liabilities (NDTL) from its current level of 9.0 per cent of NDTL.'
'The change will come into effect from the fortnight beginning October 11, 2008. As a result of this reduction in the CRR, an amount of about Rs 20,000 crore would be released into the system. This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions,' the statement added.
'It may be recalled that on September 16, 2008, the Reserve Bank announced several measures to alleviate the pressures on domestic financial markets brought on by external developments in response to the bankruptcy/sell-out/restructuring of some of the world's largest financial institutions,' the statement said.
'Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks,' the RBI said.
'These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF,' the RBI statement said.
The Reserve Bank also said that the 'overall stance of monetary policy in 2008-09 accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum, as set out in the Annual Policy Statement and reiterated in the First Quarter Review of July 2008. The overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.'
The central bank's move will infuse Rs 20,000 crore (Rs 200 billion) into the markets.
The RBI said in a statement: 'On a review of the current liquidity situation in the context of global and domestic developments, it has been decided to reduce the Cash Reserve Ratio (CRR) by 50 basis points to 8.5 per cent of net demand and time liabilities (NDTL) from its current level of 9.0 per cent of NDTL.'
'The change will come into effect from the fortnight beginning October 11, 2008. As a result of this reduction in the CRR, an amount of about Rs 20,000 crore would be released into the system. This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions,' the statement added.
'It may be recalled that on September 16, 2008, the Reserve Bank announced several measures to alleviate the pressures on domestic financial markets brought on by external developments in response to the bankruptcy/sell-out/restructuring of some of the world's largest financial institutions,' the statement said.
'Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks,' the RBI said.
'These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF,' the RBI statement said.
The Reserve Bank also said that the 'overall stance of monetary policy in 2008-09 accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum, as set out in the Annual Policy Statement and reiterated in the First Quarter Review of July 2008. The overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.'
Tuesday, April 29, 2008
RBI hikes CRR by 25 bps; repo, reverse repo rates intact
In its Credit Policy, the RBI has hiked the CRR by 25 bps to 8.25%. It has left the repo, reverse repo rates unchanged. The RBI aims at 4-4.5% inflation going forward. It is attempting to bring down the inflation to 5.5% in FY09.
The RBI has set the FY09 GDP growth target at 8-8.5%. It is aiming at a credit growth of 20% in FY09. The central bank has upped its home loan limit of 50% risk weight to Rs 30 lakhs from Rs 20 lakhs. The local factors would remain dominant for policy setting, The RBI said. It will continue emphasising on anchoring inflation expectations. It will also ensure a rate environment with high priority to price stability, it said.
The RBI plans to respond swiftly on a continuing basis to evolving situations. Its emphasis would be on credit quality and delivery for sensitive sectors.
The RBI has set the FY09 GDP growth target at 8-8.5%. It is aiming at a credit growth of 20% in FY09. The central bank has upped its home loan limit of 50% risk weight to Rs 30 lakhs from Rs 20 lakhs. The local factors would remain dominant for policy setting, The RBI said. It will continue emphasising on anchoring inflation expectations. It will also ensure a rate environment with high priority to price stability, it said.
The RBI plans to respond swiftly on a continuing basis to evolving situations. Its emphasis would be on credit quality and delivery for sensitive sectors.
Subscribe to:
Posts (Atom)
