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India Unexpectedly Cuts Reserve Ratio as BRICs Act on Growth

The Reserve Bank of India (RBI) headquarters in Mumbai. The RBI reduced the cash reserve ratio to 5.5 percent from 6 percent. Photographer: Kainaz Amaria/Bloomberg
The Reserve Bank of India (RBI) headquarters in Mumbai. The RBI reduced the cash reserve ratio to 5.5 percent from 6 percent. Photographer: Kainaz Amaria/Bloomberg

Jan. 24 (Bloomberg) -- India’s central bank unexpectedly cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signaled future interest-rate cuts, joining BRIC nations in shielding growth. Stocks rose.

The Reserve Bank of India reduced the cash reserve ratio to 5.5 percent from 6 percent, it said in a statement in Mumbai today. The move adds around 320 billion rupees ($6.4 billion) into lenders, it said. Three of 21 economists in a Bloomberg News survey predicted the decision, with two foreseeing a quarter-point cut and the rest no change. The central bank left the benchmark repurchase rate at 8.5 percent for a second month.

Brazil, China and Russia have either cut borrowing costs or lenders’ reserve requirements in recent weeks as the debt crisis in Europe saps global expansion. While India’s inflation, stoked by rupee weakness, is the fastest in the group, it eased to a two-year low last month, giving Governor Duvvuri Subbarao more room to inject cash into a slowing economy.

“If they didn’t do the reserve ratio cut, there was a risk of liquidity deficit adding to the downside risks to growth,” said Leif Eskesen, an economist at HSBC Holdings Plc in Singapore. “It’s a bit premature to cut rates now given risks to inflation from bottlenecks in the economy and the decline in the rupee.”

Indian stocks rose to a more than two-month high as the BSE India Sensitive Index closed up 1.5 percent. The yield on the 8.79 percent note due November 2021 rose 20 basis points, or 0.20 percentage point, to 8.37 percent on speculation the RBI may halt bond purchases following the reserve ratio cut.

Growth Concern

India’s rupee, which has surged about 6.3 percent against the U.S. dollar this year, was little changed. It is Asia’s best performer this year after sliding 16 percent in 2011.

“The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained,” the central bank said in today’s statement.

The reduction in the reserve ratio, effective Jan. 28, aims to “address structural pressures on liquidity in a way” consistent with the prevailing monetary stance, the RBI said. The persistence of “tight liquidity conditions” could disrupt the flow of credit and further exacerbate growth risks, it said.

The Reserve Bank today cut India’s growth forecast to 7 percent in the year through March from the 7.6 percent predicted in October. It kept the inflation estimate at 7 percent. The benchmark wholesale-price index rose 7.47 percent in December.

Rate Cuts ‘Premature’

Inflationary threats make it “premature” to start cutting rates, it said. These risks include the fiscal deficit, the rupee’s fall and suppressed inflation from the domestic prices of some administered products such as coal, it said.

At the same time, the reserve-ratio cut “can be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them,” the central bank said.

All 21 respondents in Bloomberg’s survey predicted no change in the repurchase rate today.

The Reserve Bank also said that without “credible fiscal consolidation” it will be “constrained” from lowering the repurchase rate.

Economic growth will be “slightly” faster in the fiscal year starting April 1 with inflation showing “some moderation” while remaining vulnerable to “upside risks,” the RBI said.

The monetary authority has added 718.8 billion rupees into the banking system since the start of November by buying government securities from lenders.

Bond Purchases

Subbarao told a briefing that it was too early to decide whether to continue with the program. Deputy Governor Subir Gokarn said later the reserve ratio cut doesn’t rule out further such open market operations.

India’s inflation rate last month compares with 6.5 percent in Brazil, 6.1 percent in Russia and China’s 4.1 percent.

Brazil on Jan. 18 cut its benchmark rate by half a point for a fourth straight policy meeting to shield the economy. Russia last month unexpectedly reduced its benchmark rate. China in November cut the amount of cash that banks must set aside as reserves for the first time since 2008.

Higher borrowing costs in India are hurting demand. Maruti Suzuki India Ltd., maker of almost half the cars sold in the country, said Jan. 2 that its local sales for the April to December period declined 17 percent.

Commercial banks sanctioned 339 billion rupees of loans in the three months through September, a 77 percent drop from the same quarter in the previous year, according to RBI data.

“The rate cycle according to me has peaked and therefore now it is time to focus on growth,” said R. Gopalan, the top bureaucrat in the department of economic affairs at the Ministry of Finance.

Prime Minister Manmohan Singh is under pressure to boost expansion following a struggle to attract more foreign investment, street protests against inflation and corruption allegations against officials.

His government faces at least five regional elections starting this month, including one in Uttar Pradesh, India’s most populous state. National polls are due in two years.

To contact the reporter on this story: Kartik Goyal in New Delhi at

To contact the editor responsible for this story: Brendan Murray at

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