The Reserve Bank of India reduced the cash reserve ratio to 4.75 percent from 5.5 percent, according to an e-mailed statement yesterday. The move, the first such action outside a policy meeting since July 2010, will add 480 billion rupees ($9.6 billion) into lenders, it said. The bank last reduced the ratio by 50 basis points, or 0.5 percentage point, on Jan. 24.
The unscheduled step before a March 15 policy review underscores the RBI’s concern that a shortage of cash in the banking system will hurt the economy, forecast to expand at the slowest pace in three years in the fiscal period ending March 31. Asian nations including China and the Philippines have eased monetary policy to spur growth amid Europe’s debt crisis.
“The strong and surprise action by the RBI is aimed at ensuring that the rapid deterioration in growth momentum is arrested,” said Shubhada Rao, chief economist at Yes Bank Ltd. (YES) in Mumbai. “The CRR cut will help alleviate the stress in the banking system and guide the liquidity deficit to lower levels.”
Lenders borrowed an average 1.33 trillion rupees a day from the Reserve Bank so far this month, according to central bank data. That’s more than double the 600 billion-rupee limit favored by the monetary authority and signals a shortage of funds.
The reduction in the cash reserve ratio, which was announced after markets closed yesterday, is effective from March 10, according to the statement. The central bank lowered the ratio to its lowest level since 2004 in anticipation of companies withdrawing money from the system to pay taxes by a March 15 deadline.
“The liquidity deficit is expected to increase significantly during the second week of March due to advance tax outflows,” the central bank said in the statement. “Thus, the overall deficit in the system persists above the comfort level of the Reserve Bank.”
The rupee strengthened 0.9 percent to 49.8550 per dollar at the close in Mumbai yesterday. It has rebounded about 6.5 percent so far in 2012 after sliding 16 percent last year, the worst fall in Asia. The BSE India Sensitive Index (SENSEX) advanced 2.1 percent. The yield on the 8.79 percent note due November 2021 rose four basis points to 8.29 percent.
Cash availability with Indian lenders dropped after the central bank bought rupees to stem the decline in the currency, and companies borrowed to finance imports, said Roy Paul, a deputy general manager at Federal Bank Ltd. (FB) in Mumbai.
Economic expansion in India is already waning after the central bank raised interest rates by 3.75 percentage points between March 2010 and October 2011 to tame the fastest inflation among BRIC nations that include Brazil, Russia and China. India’s gross domestic product rose 6.1 percent in the final quarter of 2011 from the year earlier period. That’s the weakest expansion since the first quarter of 2009.
To ease the liquidity shortage in the banking system, the Reserve Bank has also injected about 1.2 trillion rupees this fiscal year purchasing government bonds, the central bank said.
China reduced the amount of cash that banks must set aside as reserves by half a percentage point to 20.5 percent from Feb. 24. The Philippines central bank lowered the rate it pays lenders for overnight deposits by a quarter of a percentage point to 4 percent on March 1.
“The current liquidity situation is hurting economic growth and that explains the emergency move,” said Vivek Rajpal, a Mumbai-based fixed-income strategist at Nomura Holdings Inc. “The stressful liquidity condition is not healthy for expanding credit needs of the economy.”