India: Surprise Reserve Requirement Cut

Econintersect:  The RBI (Reserve Bank of India) made a surprise move at its quarterly meeting by reducing the cash reserve requirement (CRR) by 50 basis points to 5.5%  This comes after two years of tightening monetary policy by the central bank in an attempt to fight inflation.  Inflation has been easing recently with a sharp drop in December (GEI News).  A number of knowledgable observers indicated that the reduced reserve requirement would help with liquidity in the banking system but was not likely to influence interest rates, at least not in the near future (The Times of India).   The move was made as the latest estimates for GDP growth were reduced to 7.0% from 7.6%.

From The Times of India:

“The rate cut has lifted the mood and we should see an increase in (loan) volumes going ahead” said Chaudhuri. Keki Mistry, vice chairman and CEO, HDFC, however, doesn’t expect rates to come down immediately. “I expect that in FY2012-13 interest rates will come down by around 150 basis points,” he said.

There were those who said the move did not go far enough.  The FICCI (Federation of Indian Chambers of Commerce and Industry) said a repo rate cut was also needed.

Sources:  The Times of India (from Econintersect Asia newspaper page) and GEI News