India further slashes interest rates - ResearchInChina

Date:2008-11-03liaoyan  Text Size:

INDIA'S central bank unexpectedly cut interest rates for the second time in two weeks at the weekend. The bank also cut reserve requirements for money lenders to protect the economy from the global slowdown.

The Reserve Bank of India lowered its repurchase rate to 7.5 percent from 8 percent on Saturday, reduced the amount of deposits that lenders need to set aside as reserves to 5.5 percent from 6.5 percent, and cut the amount of money lenders are required to keep in government bonds to 24 percent from 25 percent.

The steps signal a U-turn from the Reserve Bank's policy stance just a week ago, when Governor Duvvuri Subbarao said a "heightened vigil" was needed to fight inflation.

The United States Federal Reserve, the Bank of Japan and other central banks also slashed borrowing costs last week in an attempt to prevent a global credit crunch from pushing the world into recession.

"This is a strong message that growth has become the central bank's priority," said Sujan Hajra, chief economist at Anand Rathi Securities Ltd in Mumbai. "It has room to cut rates because global interest rates are coming down as well, and so the risk of a further weakening of the rupee is limited."

Subbarao, who until recently placed equal emphasis on growth and inflation, said last week he is concerned that a weaker rupee may raise import costs and stoke inflation.

India's currency, which has fallen 20 percent since January, climbed 0.4 percent to 49.4575 a dollar from 49.675 on Friday, reported Bloomberg News.

Inflation risks

The Bank of Japan on Friday cut its key overnight lending rate by 20 basis points to 0.3 percent after the Fed lowered its target rate for overnight loans to 1 percent, matching a half-century low.

India's decision to lower borrowing costs was taken "in view of the ebbing of upside inflation risks and also to address concerns relating to the moderation in the growth momentum," the central bank said.

Lower inflation has given Governor Subbarao, in the job for less than two months, more room to lower borrowing costs to stimulate growth.

Inflation in India has dropped below 11 percent for the first time since May.

Wholesale prices rose 10.68 percent in the week to October 18 from a year earlier after gaining 11.07 percent in the previous week.

Economists had expected a 10.80-percent increase.

The central bank last week reduced its forecast for growth in Asia's third-largest economy to as low as 7.5 percent from 8 percent in the year to March 31.

"It's a good set of measures that addresses the most pressing need of the hour, which is to ease liquidity constraints in the system" and support growth, said Arvind Sampath, head of interest-rate trading at Standard Chartered Plc in Mumbai.

India's money-market rates have more than tripled in the past week, in contrast to the rest of Asia where the rates at which banks lend to each other has been declining.

The overnight call rate in India touched 21 percent while India's 10-year bonds gained, heading for their best month in almost a decade.


2005-2011 www.researchinchina.com All Rights Reserved 京ICP备05069564号-1