India Unexpectedly Orders Banks to Keep More Reserves
India's central bank unexpectedly ordered lenders to set aside more reserves for the second time in less than two weeks to tame runaway inflation.
The Reserve Bank of India raised its cash reserve ratio to 8.25 percent from 8 percent, according to a statement in Mumbai. Nineteen of 20 analysts surveyed by Bloomberg News forecast no change. Bonds and stocks rallied after the central bank held interest rates.
Governor Yaga Venugopal Reddy today said the Reserve Bank may have to take more measures to curb inflation that's near a three-year high while ensuring economic growth of at least 8 percent. Prime Minister Manmohan Singh has made tackling prices the government's top priority as food costs sap his Congress Party's popularity before elections within a year.
Reddy has “left enough room for rate increases,'' said K. Ramanathan, who manages the equivalent of $2.2 billion in Indian debt at ING Investment Management Pvt. in Mumbai. “He has mentioned demand-side pressure could add to inflation'' and a rate increase “may still come any time.''
Raising borrowing costs from a six-year high may slow growth in Asia's third-largest economy to a four-year low, the Reserve Bank said. Singh's government had planned to accelerate growth to as much as 10 percent by 2012 to generate employment and reduce poverty, fulfilling a 2004 election pledge. The economy has averaged a record 8.7 percent pace of expansion for five years.
Stocks, Bonds Rally
The key Sensitive Index extended gains, paced by banking stocks, as interest rates were left unchanged. The index rose 2.1 percent to 17,375.05 at 3:15 p.m. in Mumbai.
Benchmark bond yields declined the most in 16 months. The yield on the 8.24 percent note maturing in April 2018 dropped 13 basis points from yesterday to 8 percent. The rupee was little changed at 40.2425 versus the dollar. A basis point is 0.01 percentage point.
Inflation won't ease for a few weeks, Reddy said at a press briefing at the central bank in Mumbai.
The Reserve Bank expects inflation, currently near a three- year high at 7.33 percent, to slow to 5.5 percent by March 31. Economic growth may ease to between 8 percent and 8.5 percent, the bank said, as its policy since October 2004 of raising borrowing costs to damp inflation reduces consumer demand.
India will scrap the import tax on pig iron and steel products and impose an export tax on Basmati rice to bolster domestic supply and curb price gains, Finance Minister Palaniappan Chidambaram told parliament in New Delhi today.
New Measures
“We are ready with a set of administrative measures,'' the minister later told reporters, without elaborating easy fast cash. “We will be discussing these measures in the next few days.''
Chidambaram said the anti-inflationary fiscal steps announced today would cost the government 15 billion rupees ($372 million). Previous fiscal measures, including the scrapping of import taxes on edible oils and maize and a ban on exports of rice, pulses and cement, have cost the government 48.4 billion rupees, he said.
“The central bank and the government have placed inflation on top of their agenda,'' said Tapan K. Bhaumik, chief economist at Reliance Industries Ltd., India's most valuable company. “Inflation has become a political concern. No one is talking about growth anymore.''
Losing Support
The Congress Party has lost ground in eight state polls since January 2007 due to rising prices. Indians have ousted national governments in the past as inflation eroded the spending power of the nation's poor. The World Bank estimates about half of India's 1.1 billion people survive on less than $2 a day.
Reddy raised the cash reserve ratio, or the proportion of deposits lenders must place with it, by 50 basis points to 8 percent on April 17 to reduce money supply and slow inflation. Today's increase, the seventh since December 2006, takes effect from May 24.
“There are concerns that demand pressures, which have been reasonably contained so far, are being coupled with supply-side factors'' to stoke inflation, Reddy said in today's statement. “It is necessary to moderate monetary expansion.''
The central bank's repurchase rate, or the overnight lending rate, was held at a six-year high of 7.75 percent today. The reverse repurchase rate was maintained at 6 percent.
India and China, the world's fastest growing major economies, are increasing their cash reserve ratios to slow inflation. China this month raised the limit for the third time this year to a record 16 percent.
“A tightening of monetary conditions will have little or no near-term impact on inflation, the recent surge in which has mainly reflected sharply higher international oil, food and other commodity prices,'' said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore.
Inflation in India's $912 billion economy is accelerating principally on account of rising prices of food and some manufactured products such as steel and cement.
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