India’s central bank unexpectedly cut the amount of deposits lenders need to set aside as reserves to ease a cash squeeze in the banking system that threatens to deepen an economic slowdown.
The Reserve Bank of India (RBI) reduced the cash reserve ratio (CRR) to 4.75 percent from 5.5 percent, according to an e-mailed statement on Friday. The move, the first such action outside a policy meeting since July 2010, will add 480 billion rupees (US$9.6 billion) into lenders, it said. The bank last reduced the ratio by 50 basis points, or 0.5 percentage points, on Jan. 24.
The unscheduled step before a policy review on Thursday underscores the RBI’s concern that a shortage of cash in the banking system will hurt the economy, forecast to expand at its slowest pace in three years in the fiscal period ending March 31.
ENCOURAGING GROWTH
Asian nations including China and the Philippines have eased monetary policy to spur growth amid Europe’s debt crisis.
“The strong and surprise action by the RBI is aimed at ensuring that the rapid deterioration in growth momentum is arrested,” said Shubhada Rao, chief economist at Yes Bank Ltd in Mumbai.
“The CRR cut will help alleviate the stress in the banking system and guide the liquidity deficit to lower levels,” Rao said.
Lenders have borrowed an average of 1.33 trillion rupees a day from the RBI so far this month, according to central bank data. That’s more than double the 600 billion-rupee limit favored by the monetary authority and signals a shortage of funds.
WITHDRAWALS
The reduction in the cash reserve ratio, which was announced after markets closed on Friday, was effective from yesterday, according to the statement. The central bank lowered the ratio to its lowest level since 2004 in anticipation of companies withdrawing money from the system to pay taxes by Thursday’s 15 deadline.
“The liquidity deficit is expected to increase significantly during the second week of March due to advance tax outflows,” the central bank said in the statement. “Thus, the overall deficit in the system persists above the comfort level of the Reserve Bank.”
CURRENCY FLUCTUATIONS
The rupee strengthened 0.9 percent to 49.8550 per US dollar at the close in Mumbai on Friday. It has rebounded about 6.5 percent so far this year after sliding 16 percent last year, the worst fall in Asia.
The BSE India Sensitive Index advanced 2.1 percent. The yield on the 8.79 percent notes due in November 2021 rose four basis points to 8.29 percent.
Cash availability with Indian lenders dropped after the central bank bought rupees to stem the decline in the currency and companies borrowed to finance imports, said Roy Paul, a deputy general manager at Federal Bank Ltd in Mumbai.
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