India’s central bank cuts key rates to spur growth

REACTION: In an effort to boost liquidity, the bank also announced it was lowering the ratio of deposits that banks were required to hold in government securities


Sun, Nov 02, 2008 - Page 11

India’s central bank cut its key short-term lending rate yesterday and announced other monetary steps to spur economic growth as it moved to counter the impact of the global financial crisis.

The Reserve Bank of India, citing “unsettled” financial conditions, reduced its key short-term lending rate, the repo, by 50 basis points to ease a credit crunch and inject liquidity into financial markets. The repo is the rate at which it lends funds to commercial banks.

The bank also announced on its Web site it was cutting the amount of cash commercial banks must hold in reserve, easing the so-called cash reserve ratio to 6.5 percent from 5.5 percent — pumping billions of dollars into the financial system.

And it said it was cutting the statutory reserve ratio — the proportion of deposits banks must hold in government securities — to 24 percent from 25 percent to boost liquidity.

Banks around the world have been cutting rates to spur growth, with the US Federal Reserve on Wednesday slashing its main policy rate to 1 percent and China also lowering key interest rates.

The Bank of Japan cut its key lending rate on Friday for the first time since 2001 to 0.3 percent, saying that “increased sluggishness in Japan’s economic activity will likely remain over the next several quarters.”

Speculation grew that the European Central Bank and the Bank of England would follow suit next week with fresh rate cuts.

The Indian moves, announced on a Saturday when financial markets were closed, were the latest in a slew of easing steps by the bank to stabilize domestic markets, which have been feeling the heat from the global crisis.

India’s stock market has tumbled by 53 percent from highs in January as risk-averse foreign investors have pulled out their funds and parked them in investment safe havens while the rupee has tumbled by nearly 20 percent against the dollar this year to record lows.

“Global financial conditions continue to remain uncertain and unsettled, and early signs of a global recession are becoming evident,” the bank said.

“These developments are being reflected in sharp declines in stock markets across the world and heightened volatility in currency movements. International money markets are yet to regain calm and confidence,” the bank said.