India’s central bank on Friday moved to crank up lending to spur slackening growth in Asia’s
third-biggest economy by lowering the amount of cash reserves commercial banks must keep on deposit.
The Reserve Bank of India cut the cash reserve ratio for commercial banks by 75 basis points to 4.75 per cent — reducing the amount of money they must set aside as deposits and, in effect, allowing them to lend more.
‘It has been decided to reduce the CRR (cash reserve ratio) of scheduled banks by 75 basis points from 5.5 per cent to 4.75 per cent,’ the RBI said in a statement, its second such cut in the 2012 calendar year.
The move, which RBI says is expected to inject 480 billion rupees ($9.6 billion) into the banking system, comes less than a week before the central bank’s mid-quarter monetary policy review on March 15.
The bank said in a statement it took the step because the shortfall among banks to fund loans was still ‘above the comfort level’.
It said it wanted to ensure the ‘smooth flow of credit to productive sectors of the economy’.
The bank last reduced the cash reserve ratio by 50 basis points on January 24, pumping $6.27 billion into the commercial banking system that could be turned into loans.
The bid to accelerate growth comes after
official data late last month showed that India’s economy expanded by 6.1 per cent in the last three months of 2011, the weakest pace in around three years.
‘The Reserve Bank has acted pre-emptively, fearing more liquidity concerns,’ Shubhada Rao, chief economist at India’s private Yes Bank, told the AFP.
Indian companies are expected to withdraw
money from the banking system to pay their taxes by a March 15 deadline, exacerbating liquidity problems.
Some analysts said the bank may wait until after the federal budget is presented on March 16 to assess the inflationary impact of the government’s spending plans before starting to unwind its interest rate hikes.
But others said that the central bank could cut rates at its monetary policy meeting ahead of the budget.
‘We expect the Reserve Bank to build on this measure (the cash reserve ratio cut) and reduce interest rates by 25 basis points at next week’s policy meeting,’ Rao said.
The weaker economic growth has come on the back of 13 interest rate hikes between March 2010 and October 2011 that have sapped demand and pulled down manufacturing output.
The bank is moving to relax monetary policy with inflation now at a two-year low of 6.55 per cent.
For the full financial
year to March, India’s
economy will probably grow by 6.9 per cent — far below an initial projection of nine per cent — and down from last year’s 8.4 per cent expansion, the government forecast last month.
However, some private economists expect growth to be at the bottom end of the six per cent range.