India cuts reserve ratio to boost growth while holding rates

Chidambaram’s View

The reserve-ratio cut is a “small but welcome” measure, Finance Minister Palaniappan Chidambaram said in New Delhi today. He said he’s confident the central bank’s review on Oct. 30 will be “far more supportive of growth” as the government is expected to make further policy changes and lay out a path to “fiscal correction.”

There could be a slight slippage in the fiscal deficit even as the government plans to stick to the borrowing schedule for the year through March 2013, Chidambaram said later in comments to Bloomberg TV India. Growth could range from 6.1 percent to 6.7 percent this year, he said.

The Reserve Bank’s decision comes after Asian nations such as the Philippines, Indonesia, Malaysia and South Korea held rates this month. Officials are evaluating the impact of the U.S. Federal Reserve’s decision on Sept. 13 to embark on a third round of bond purchases to boost growth and employment.

Policy Logjam

India’s moves last week to contain spending on diesel subsidies and boost foreign investment in industries from retailing to aviation followed a months-long policy logjam that dimmed the outlook for Asia’s third-largest economy.

The gridlock was caused in part by discord in Singh’s fractious ruling coalition over whether the policies should be implemented. Corruption allegations added to the gloom by paralyzing Parliament.

“The government has initiated big-ticket reforms,” said Jyoti Narasimhan, India economist at IHS Global Insight in Bangalore. “It will still need to do more to spur investment and economic growth, and of course not roll back any of these measures in the face of expected heavy political opposition.”

The Reserve Bank predicts Indian expansion will hold at a nine-year low of 6.5 percent in the fiscal year through March 2013 as investment moderates and Europe’s debt crisis weighs on global growth. Forecasters including Goldman Sachs Group Inc. and Citigroup Inc. expect a pace of less than 6 percent.

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