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India's central bank unexpectedly cut interest rates for the second time in two weeks and reduced the amount of money lenders must hold in reserve in a bid to protect the economy from the global slowdown.
The Reserve Bank of India lowered its repurchase rate to 7.5 percent from 8 percent, 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 U.S. Federal Reserve, the Bank of Japan and other central banks also slashed borrowing costs this 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. ``He 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 last week placed equal emphasis on growth and inflation, said Oct. 25 he is concerned 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 per dollar from 49.675 on Oct. 29.
Growth `Moderation'
The Bank of Japan yesterday cut its key overnight lending rate by 20 basis points to 0.3 percent after the Fed three days ago lowered its target rate for overnight loans to 1 percent, matching a half-century low. Norway, China, Taiwan and Hong Kong also trimmed their benchmark rates this week.
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 today.
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 Oct. 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.
Credit Squeeze
``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 yesterday. India's 10-year bonds gained, heading for their best month in almost a decade, on speculation policy makers will be forced to step up efforts to boost cash with banks and ease a credit squeeze.
Today's cut in the cash reserve ratio, the fourth in the past month, will infuse 400 billion rupees ($8 billion) into the financial system, the central bank said. Before today, the bank lowered the ratio by 2.5 percentage points in the past month.
The Reserve Bank also reduced for the first time in 11 years the statutory liquidity ratio, the amount of deposits that lenders need to invest in government debt or bonds of state-run companies, by one percentage point.
``This kind of fund injection is required to bring in stability in the financial market,'' said Jayesh Shroff, who helps manage about $6 billion at SBI Asset Management Co. ``The system has been under stress because of liquidity shortfall.''
Cash dried up in India's banking system as overseas investors pulled out $12.7 billion from India's stock markets.
Article orignally posted @ Bloomberg.com
MUMBAI (Reuters) – The Reserve Bank of India (RBI) kept interest rates unchanged as expected on Friday so see if a hefty, surprise cut earlier this week shores up the economy in the face of a global slowdown.
Still, the decision disappointed investors who slammed the the BSE Sensex down more than 10 percent to its lowest level in almost three years in the midst of a broader emerging markets' sell off.
At one point, the Sensex and Nifty were down 12 and 14 percent respectively.
"The market was also expecting some liquidity measures, especially for sectors like real estate that have been hit very badly. The market trend is down and in this situation even if the policy is neutral, it will be taken as negative," said Neeraj Dewan, a director at Quantum Securities. Analysts had predicted rates would be left unchanged because of drastic measures by the RBI in the past two weeks to confront a severe downturn in the global economy.
On Monday, it surprised markets by slashing its repo rate by 1 percentage point to 8 percent, the first cut in over four years. It has also slashed the level of reserves banks must hold by 250 basis points in the past two weeks. Central banks globally have scrambled to fend of the financial storm unleashed in the past month following the collapse of Lehman Brothers.
In its quarterly policy review, the Reserve Bank of India cut its 2008/09 economic growth forecast to between 7.5 percent and 8.0 percent, from around 8 percent and noted the difficulty of policy making.
"This is uncharted territory with no standard or conventional solutions," it said. The RBI said it had to strike an "optimal balance" between financial stability, price stability, anchoring inflation expectations and sustaining growth. "To manage this challenge the RBI has deployed and will continue to deploy both conventional and unconventional tools," it said. The RBI left the reverse repo rate, the rate at which it absorbs excess cash from banks, steady at 6.0 percent. The bank rate remained at 6.0 percent.
"Policy changes that need to be done have been implemented before the quarterly statement," said Han-Sia Yeo, strategist at Bank of America in Singapore. "The change in bias away from inflation is clear. Managing financial stability risk remains a near-term priority, which means the market will remain flush with liquidity."
Finance Minister Palaniappan Chidambaram said the RBI review endorsed the government's assessment of the economy's fundamentals and financial stability, and said calm and confidence were needed to tide over the global crisis.
STOCKS SLUMP
But investors took a different view, knocking the BSE Sensex down more than 10 percent. The fall accelerated significantly after the rate decision although the market has been swept lower in a global sell off of emerging market assets.
The rupee hit a record low against the dollar in early trading of just over 50 to the dollar before the RBI was suspected of intervening to provide the currency with a prop.
India has been particularly vulnerable to rising risk aversion among foreign investors. They have pulled out more than $12 billion this year from the stock market, which has lost more than half of its value so far in 2008. It rose 47 percent in 2007.
A loss of capital inflows from foreign portfolio investment could add to pressure on the balance of payments because the current account deficit is already running at nearly 2 percent of gross domestic product.
Monday's rate represented a sudden shift for the RBI which had raised the rate in June and July to combat double-digit inflation.
The RBI on Friday said inflation remained a concern and rapid credit growth also needed monitoring. It said it would keep a close vigil on financial markets and enhance liquidity if pressures persisted.
"This could also mean curtailing liquidity if the recent liquidity easing measures are seen to have injected excess liquidity, thereby stoking inflationary pressures," it said. "We cannot afford to let the guard slip on our inflation vigil."
The annual rate of wholesale inflation, India's main measure of price pressures, eased to just over 11 percent in the latest data for early October, down from a peak of 12.91 percent in early August.
Falling oil and commodity prices mean it is expected to moderate further by the end of this year, giving policy makers some room to cater to growth.
Monday's rate cut came after major central banks, including in the United States, Europe and China, cut interest rates in unison to try to restore confidence in the world's shattered financial markets.
In Asia, other central banks have also cut rates, including Taiwan and South Korea.
After a long wait Reserve Bank of India ( RBI ) finally slashed the CRR. On Monday , after market hours RBI breifed a meeting and announces 50bps down in Cash Reserve Ratio (CRR) to 8.50% from currently 9%. The change will come into effect from the fortnight beginning Oct. 11, 2008. As a result of this reduction in the CRR, an amount of about Rs 200 billion or 20000crores would be released into the system.
This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions, a government notification said. It may be recalled that on Sep. 16, 2008, the RBI announced several measures to ease the pressures on domestic financial markets brought on by external developments in response to the bankruptcy/sell-out/restructuring of some of the world`s largest financial institutions. Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks.
These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the liquidity adjustment facility (LAF). Active liquidity management is a key element of the current monetary policy stance.
The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants, it added.
SEBI removes ban on issuance of P-Notes
Market regulator, Securities & Exchange of India (SEBI) has decided to lift curbs on the issuance of the Participatory Notes (P-Notes) by the Foreign Institutional Investors (FIIs) in a bid to revive the stock markets troubled by the global financial meltdown. SEBI Chairman C. B. Bhave after the Board meeting in Mumbai said that the regulator will remove the 40% restriction for issuance of Particpatory Notes for both cash and derivative segments.
SEBI has also decided to undertake a comprehensive review of FII framework in the backdrop of global developments triggered by ongoing global turmoil. The regulator had imposed the restrictions on the P-Notes in October last year amid excessive speculation.
According to sources, RBI this information so that it therefore wants to get to know these banks, how much investment in American institutions and the financial crisis on Indian banks What impact is going to fall. Areguletors this kind of information you need on the action and they will help in any way possible will be able to deal with the crisis. The High-Level Coordination Committee on Financial Markets (HLCCFM) chaired by RBI Governor D Subbarao "reviewed...the preparedness of all regulators to act in a coordinated and timely manner to deal with the emerging market situation in order to ensure continued smooth functioning of the markets", said a central bank release.
The HLCCFM, which met yesterday in the backdrop of global financial turmoil, was attended by Finance Secretary Arun Ramanathan, Economic Affairs Secretary Ashok Chawala, SEBI Chairman C B Bhave, PFRDA Chairman D Swarup and IRDA Member C R Muralidharan.
Noted , U.S. is in deep financial crisis after the Great Dipression of 1929. Some of its top banks became bankcrupt or taken over by diffrent companies due to sub prime crisis. US Gov put hefty $85 bl of 70% stake AIG, biggest nationalisation of world. AIG get big toast on Sub Prime Crisis. Wachovia is taken over by Citi Financial , WaMu is taken over by US Gov and later sold to JP Morgan , Lehman applied for Bankcruptcy and two mortgage lender Freddie Mac and Fannie Mae get gaint help from US Treasury Depertment.
Finance Minister P Chidambaram recently said in his statement that the international financial crisis, Indian banks are not affected by the heat. Broking Firm Edelwise believes that the broking firm ICICI Bank has investment in Lehman Brothers of about $8 million. If bank get its 50% return on Investment due to failure then also there will be a loss of $4 million.
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