Gokarn Signals RBI Will Refrain From Cutting Cash Reserve Ratio

India’s central bank will not compromise on its fight against inflation to address a cash deficit in the banking system, Deputy Governor Subir Gokarn said, indicating that policy makers will refrain from cutting the amount lenders need to set aside as reserves.

“The cash reserve ratio is not just a liquidity tool but also a monetary policy signal and we are, as of now, still in a situation where inflationary pressures are high,” Gokarn said in a speech to bankers in the eastern Indian city of Kolkata yesterday. “While we want to address the liquidity situation we don’t want to do it in a way that compromises our monetary stance.”

India’s central bank has purchased 152 billion rupees ($2.94 billion) of government bonds in two operations since Nov. 24 to boost cash in the banking system. The target was to purchase as much as 100 billion rupees in each auction. The next open market operation is scheduled for today. Overnight rates surged to a three-year high in intraday trading on Nov. 18.

“The use of these tactical measures like open market operations is clearly the way we are going to go,” Gokarn said.

Wholesale price increases have held above 9 percent for 11 months and the finance ministry increased its borrowing target for the year through March by 13 percent to a record 4.7 trillion rupees.

India’s 10-year bond yields dropped to a two-month low on Dec. 5 after the central bank said it will buy debt to ease a cash shortage. The rate on the 8.79 percent bonds due November 2021 rose one basis point, or 0.01 percentage point, to 8.60 percent yesterday.

Rupee Decline

Cash availability with Indian lenders dropped after the central bank bought rupees to stem the decline in the currency and companies borrowed money to fund imports, Mahendra Jajoo, the Mumbai-based head of fixed-income investments at Pramerica Asset Managers, a unit of Newark, New Jersey-based Prudential Financial Inc. said on Dec. 1.

The rupee has lost 13.6 percent this year, making it Asia’s worst performer in the period.

Banks borrowed 924.7 billion rupees on average a day from the monetary authority in November, almost twice the amount sought in October, indicating a shortage of cash. Overnight rates surged to a three-year high of 9.1 percent in intraday trading on Nov. 18.

Record Rate Increases

The pace of economic expansion is slowing after the central bank raised interest rates by a record to tame the fastest inflation among BRIC nations, which include Brazil, Russia and China. India’s GDP grew 6.9 percent in the three months ended Sept. 30, the weakest expansion since the second quarter of 2009.

India’s benchmark wholesale-price inflation was 9.73 percent in October. By comparison, consumer prices rose 5.5 percent in China in the same month.

The Reserve Bank, which has increased borrowing costs by 375 basis points in 13 moves since mid-March 2010, said Oct. 25 that the monetary tightening will moderate economic expansion and help ease inflation, as it signaled a pause in the rate increases.

The proportion of money that banks must set aside before lending is now 6 percent.

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Tushar Dhara in New Delhi at tdhara1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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