in Mumbai October 31, 2008. Indian shares rose more than 9 percent
on Friday, led by banks on speculation the central bank may
ease monetary policy following rate cuts across the world,
including in the United States, China and Japan this week.
Reuters/Arko Datta (INDIA)
India's central bank unexpectedly cut interest rates for the second time in two weeks and reduced the amount of money lenders need to keep in government bonds and as cash reserves to boost growth amid a global slowdown.
The Reserve Bank of India lowered its repurchase rate to 7.5 percent from 8 percent, reduced the amount of deposits that lenders need to set aside as reserves to 5.5 percent from 6.5 percent, and cut the amount of money lenders are required to keep in government bonds to 24 percent from 25 percent.
The steps signal a U-turn from the Reserve Bank's policy stance just a week ago, when Governor Duvvuri Subbarao said a "heightened vigil" was needed to fight inflation. This is a strong message that growth has become the central bank's priority. It's a good set of measures that addresses the most pressing need of the hour, which is to ease liquidity constraints in the system.
India's money-market rates have more than tripled in the past week, in contrast to the rest of Asia where the rates at which banks lend to each other has been declining.
The overnight call rate in India touched 21 percent yesterday. India's 10-year bonds gained, heading for their best month in almost a decade, on speculation policy makers will be forced to step up efforts to boost cash with banks and ease a credit squeeze.
Today's cut in the cash reserve ratio, the fourth in the past month, will infuse 400 billion rupees ($8 billion) into the financial system, the central bank said. Before today, the bank lowered the ratio by 2.5 percentage points in the past month.
The Reserve Bank also reduced for the first time in 11 years the statutory liquidity ratio, the amount of deposits that lenders need to invest in government debt or bonds of state-run companies, by one percentage point.
This kind of fund injection is required to bring in stability in the financial market. The system has been under stress because of liquidity shortfall. Cash dried up in India's banking system as overseas investors pulled out $12.7 billion from India's stock markets.
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