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Gokarn Says RBI Will Refrain From Cutting Cash Reserve Ratio

The Reserve Bank of India won’t compromise on its fight against inflation to address a cash deficit, Deputy Governor Subir Gokarn said, signaling the monetary authority 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.”

Policy makers are concerned that adding cash by freeing up a part of the reserves held by banks will fan inflation that has stayed above 9 percent all of this year even after seven interest-rate increases. The central bank has purchased 243 billion rupees ($4.7 billion) of government bonds in three operations since Nov. 24 to ease the crunch, helping push benchmark 10-year bond yields to a two-month low from a three-year high touched on Nov. 4.

Overnight Rates

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

“There’s a liquidity constraint across the system or certainly for certain banks,” central bank Governor Duvvuri Subbarao told reporters in Kolkata today. “As necessary we will take appropriate actions to see that liquidity situation is eased.” The present cash reserve ratio is 6 percent of deposits.

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

The nation’s foreign-currency reserves have dropped by about $14 billion in the four weeks to Nov. 25 from $284 billion, indicating the monetary authority sold dollars to purchase its currency. The rupee has declined 14 percent this year against the greenback, the worst performer among the 10 most-traded Asian currencies.

Tactical Measures

“As far as rupee depreciation in the last three months is concerned, as we have said several times before, this is the result of developments outside the country, particularly the developments in Europe,” Subbarao said. “It’s not possible for me to tell you what the RBI has done or not done in the foreign exchange market.”

The central bank bought 91 billion rupees of bonds at an open-market operation today, short of a target of 100 billion rupees. The yield on the benchmark 8.79 percent note due November, 2021, fell seven basis points to 8.52 percent in Mumbai today on speculation Subbarao will offer to buy more securities.

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

Subbarao, who aims to cool whole-sale price inflation to 7 percent by the end of March, will review his monetary policy on Dec. 16 amid concern higher borrowing costs are slowing growth in the $1.7 trillion economy. He has increased borrowing costs by 375 basis points in 13 moves since mid-March 2010, a record, to tame the fastest inflation among BRIC nations, which include Brazil, Russia and China.

India’s gross domestic product rose 6.9 percent in the quarter to Sept. 30, the smallest gain since the three months ended June, 2009.

“Supporting growth has always been one of our objectives,” Subbarao said today. He won’t speculate on what the central bank will decide on Dec. 16, he said.

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