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Subbarao Relaxes Bank Rules on Record Cash Crunch: India Credit

Duvvuri Subbarao, governor of the Reserve Bank of India
Duvvuri Subbarao, governor of the Reserve Bank of India. Photographer: Adeel Halim/Bloomberg

India central bank Governor Duvvuri Subbarao is easing curbs on the supply of cash at banks as a record shortage of funds threatens to slow Asia’s second fastest-growing major economy.

The cost of a one-month loan between banks rose for a fourth month in November, the longest stretch since 2008, to 7.8 percent, according to the National Stock Exchange. The average amount lenders borrowed every day from the Reserve Bank of India, a benchmark used to measure the availability of money, almost doubled to 966 billion rupees ($21.3 billion) last month, including a record 1.5 trillion on Nov. 23.

The monetary authority, which this week relaxed a ruling that requires banks to invest in government bonds, may follow by cutting the cash-reserve ratio to increase the supply of funds, a finance ministry official who didn’t want to be identified said on Nov. 30. India’s stance contrasts with central banks in China and Brazil, which have been tightening monetary policy to tackle asset bubbles.

“We cannot sustain any more significant tightening in the cash markets,” said Killol Pandya, who manages the equivalent of $135 million in debt at Shinsei Asset Management Pvt. in Mumbai. “A cut in the cash-reserve ratio is the most effective short-term measure to tackle the current squeeze.”

Cash Ratio

The Reserve Bank on Nov. 29 said it would hold repurchase auctions, at which it lends money, twice every day to help tide banks over the crunch after an auction of phone licenses drained cash. Banks can now invest 23 percent of their deposits in debt, including government bonds, instead of 25 percent earlier, the central bank also said the same day.

The monetary authority last cut the cash-reserve ratio in 2008 to shield the economy from the global financial crisis. The proportion of money that banks must set aside before lending is now 6 percent.

The cash reserve ratio “clearly remains an option but we at this point believe that our monetary stance is still anti-inflationary,” central bank Deputy Governor Subir Gokarn told reporters yesterday in New Delhi. “For the time being, we are using tactical measures. We don’t want to send any mixed signals about a change in the monetary stance.”

The cost of fixing rates on money for three months surged 286 basis points this year to 6.81 percent in India’s interest- rate swaps market, data compiled by Bloomberg show, after the federal government raised 677.2 billion rupees by auctioning third-generation mobile-phone permits in May and 385.4 billion rupees by selling wireless-broadband Internet services a month later.

Tax Payments

The payment of quarterly taxes due Dec. 15 by companies will add to the cash shortage, according to Sonal Varma, an economist at Nomura Holdings Inc., Japan’s biggest brokerage.

“Definitely with 500 billion rupees to 600 billion rupees of outflow in advance taxes, the situation will worsen,” Varma said in a phone interview from Mumbai on Nov. 30. “It isn’t entirely premature to start thinking of a cut in the cash reserve ratio.”

The country’s cash shortage will ease by the end of this year, Chakravarthy Rangarajan, the prime minister’s chief economic adviser, said in New Delhi yesterday, without elaborating on reasons for such a change.


India’s 10-year bonds dropped for a fourth day today on speculation local banks, the biggest investors in the securities, will sell debt to raise cash. The yield on the 7.8 percent note due May 2020 rose one basis points to 8.12 percent, headed for the biggest weekly increase since the five-day period ended Aug. 20. The rate has advanced 14.9 points since Nov. 26, compared with a 16.5 point advance in the week to Aug. 20.

The rate on India’s three-year government notes was 7.43 percent. Similar-maturity securities yield 3.10 percent in China, 7.01 percent in Russia and 12.32 percent in Brazil. That compares with 0.84 percent for three-year U.S. Treasuries.

India’s rupee rose for a third straight day today after official data on Nov. 30 showed the economy grew 8.9 percent in the third quarter, faster than economists estimated. The currency has strengthened 2.6 percent this year to 45.34 per dollar.

Inflation Concerns

Price pressures will merit more attention than the cash crunch in the Reserve Bank’s policy decisions, according to Rajeev Radhakrishnan, a Mumbai-based money manager at SBI Funds Management Pvt. that oversees assets worth $9.2 billion. He said the central bank wants to hold down inflation that was at 8.58 percent in October, double the government’s “ideal” level.

“I have my doubts whether a cash-reserve ratio cut would be resorted to,” Radhakrishnan said in a phone interview yesterday. “The central bank has been consistent in its view that CRR is a monetary tool and cannot be used as a stop-gap measure.”

India’s three-month treasury bill yields have risen 333 basis points this year to 6.90 percent as the Reserve Bank raised borrowing costs by 150 points, data compiled by Bloomberg show. The comparable rate climbed 235 points to 11.02 percent in Brazil and 11 points to 0.16 percent in the U.S. Yields on similar notes from the People’s Bank of China rose 164 points to 2.96 percent.

‘Money Is Lifeline’

The government sold 40 billion rupees of 91-day bills yesterday at 6.94 percent, compared with 6.85 percent at the previous sale on Nov. 24. It auctioned 10 billion rupees of 364-day debt at 7.27 percent, compared with 7.20 percent on Nov. 16.

Credit-default swaps on State Bank of India rose two basis points yesterday to 179 basis points, according to data provider CMA. Such swaps usually pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and they rise as perceptions of credit quality deteriorate.

“Money is the lifeline for any economy,” D. H. Pai Panandiker, president of the RPG Foundation, an economic policy group in New Delhi, said in a phone interview yesterday. “If it becomes scarce, then companies won’t be able expand and it will hurt the economy. The effort should be to further reduce the shortage.”

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