India central bank cuts cash reserve ratio

[September 17, 2012]  NEW DELHI (AP) -- India's central bank Monday cut the cash reserve ratio as it tries to kick-start flagging growth and welcomed government efforts to open Asia's third-largest economy to more foreign investment.

The Reserve Bank of India said the share of deposits that banks must keep with it as reserves was cut by a quarter percentage point to 4.5 percent, injecting about 170 billion rupees ($3.2 billion) into the banking system.

The central bank also announced that it would keep its short-term lending rate, or repo rate, unchanged at 8 percent. The reverse repo rate at which the bank absorbs excess money by borrowing from banks, was also unchanged -- at 7 percent.

The monetary policy decisions come just days after the government announced landmark reforms aimed at giving a boost to India's economy.

The bank said the primary focus of its monetary policy remains the fight against inflation, which has been stubbornly high. Driven by high food prices, India's wholesale price index rose 7.6 percent in August from 6.9 percent the previous month.

Last week the government announced a sharp increase in the price of highly-subsidized diesel, hoping to rein in its rising fiscal deficit, but also adding to inflation pressure.

The RBI said higher diesel prices would increase inflation in the short term, but the reform measures were "significant" as they would strengthen the country's economic fundamentals.

In a surprise move on Friday, the government said it would allow foreign direct investment in retail, aviation and broadcasting. The government also announced it would sell its stakes in four state-run companies.

The central bank said the government's recent actions had paved the way for more favorable economic conditions by initiating a shift in expenditure away from consumption by reducing fuel subsidies and toward investment, including through foreign direct investment.

"Steps taken to increase FDI should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain. Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong," the RBI said in its monetary policy review.

C. Rangarajan, who heads the prime minister's Economic Advisory Council, said the RBI had taken a cautious step considering that the latest data on inflation had not been encouraging.

"This will provide some additional liquidity and will enable the banks to expand their credit portfolio. Under the circumstances, I believe this is the maximum that the Reserve Bank could have done," Rangarajan said.

The cut in the cash reserve ratio was hailed by bankers who hinted that it could trigger a reduction in lending rates in the coming days.

State Bank of India's chairman, Pratip Chaudhuri, described the cut as a "very positive move," and said the bank was likely to review its lending rates soon.

The government's announcement allowing foreign companies in retail and raising the price of diesel has met with protests from opposition parties and some of the ruling Congress party's coalition partners. However, it was welcomed by industry saying it would jumpstart the country's slowing economy.

[Associated Press; By NIRMALA GEORGE]

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