India cuts reserve ratio to boost growth while holding rates

India’s central bank unexpectedly reduced the amount of deposits lenders must set aside as reserves, supporting the government’s push to revive growth even as it kept interest rates unchanged to damp elevated inflation.

Governor Duvvuri Subbarao cut the cash reserve ratio to 4.5 percent from 4.75 percent, effective Sept. 22, adding about 170 billion rupees ($3.1 billion) to the banking system, the Reserve Bank of India said today. Three of 39 economists in a Bloomberg News survey predicted the reduction to the lowest level since 2004. The rest forecast no change after two cuts earlier in 2012.

Inflation has quickened beyond 7.5 percent, a climb that may be exacerbated by the first increase in diesel prices in 14 months and a rise in commodities as the U.S. steps up monetary easing. India boosted the subsidized fuel’s tariff last week to pare its fiscal deficit and allowed more foreign investment in the economy, the biggest policy overhaul of Prime Minister Manmohan Singh’s previously gridlocked second term.

“It’s a token move to pat the government on the back but inflation is still going to go up due to domestic price adjustments and global factors,” said Rajeev Malik, a senior economist at CLSA Asia-Pacific Markets in Singapore. “Further actions by the RBI will depend on the fiscal correction and inflation dynamics.”

Rupee Climb

The rupee strengthened 0.6 percent to 54.0075 per dollar in Mumbai, while the BSE India Sensitive Index rose 0.42 percent. The yield on the 10-year bonds due June 2022 was little changed. The currency surged 2 percent on Sept. 14 on Singh’s steps to counter India’s weakest expansion in almost a decade and prevent a credit-rating downgrade.

The central bank kept the benchmark repurchase rate at 8 percent, it said in today’s statement in Mumbai, leaving it unchanged for a third meeting as expected by 35 of 39 economists a Bloomberg survey. Four forecast a reduction to 7.75 percent.

The “primary focus” remains the containment of price pressures, the Reserve Bank said. Inflation and India’s fiscal and current-account shortfalls constrain a stronger monetary policy response to growth risks, it said.

“The government’s recent actions have paved the way for a more favorable growth-inflation dynamic,” the central bank said. “Several challenges remain, one of which is persistent inflation. But, as policy actions to stimulate growth materialize, monetary policy will reinforce the positive impact of these actions while maintaining its focus on inflation management.”

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