India Joins Brazil, Russia in Injecting Funds, Holding Rates

By Cherian Thomas and Archana Chaudhary

Oct. 16 (Bloomberg) -- India joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch without risking interest rate-cuts that may fan inflation.

The Reserve Bank of India yesterday cut its cash reserve ratio to 6.5 percent from 7.5 percent to ease the worst cash crisis in the economy since 2000. Russia lowered its reserve requirement for the second time in a month, while Brazil reduced the measure Oct. 13 for the fourth time in three weeks.

Only China among the so-called BRIC economies has cut interest rates after the nation's inflation rate almost halved since April. Prices are still at elevated levels in India, Russia and Brazil, and the decline in their currencies this year may stoke inflation from higher import costs.

``There are a number of countries that haven't cut rates and the common feature for all of them is that their domestic inflation numbers are still quite high,'' said Subir Gokarn, Asia-Pacific chief economist at Standard & Poor's. ``That is really what is holding back the Reserve Bank of India.''

Brazil's real has slumped 28 percent from a nine-year high on Aug. 1 and India's rupee fell to a record low this month as investors spooked by the global credit crisis have sold emerging market assets. Stocks tumbled in all three markets yesterday on concern a U.S. recession will depress corporate earnings worldwide and deepen financial turmoil.

`Gigantic Casino'

``It's unacceptable that we will pay for the irresponsibility of speculators that transformed the world into a gigantic casino and at the same time they give us lessons on how we should govern our countries,'' Brazilian President Luiz Inacio Lula da Silva said in New Delhi yesterday. ``We are the victims of a financial crisis generated by the rich countries.''

India has injected one trillion rupees ($21 billion) since Oct. 11 as call money rates surged and mutual funds sought government help to meet redemptions by investors. India's call rates, which averaged 8.42 percent in the past six months, closed at 10.25 percent yesterday.

The government yesterday increased interest rates on deposits by non-resident Indians and doubled the overseas investment limit in corporate bonds to $6 billion to shore up the rupee from near a record low.

Finance Minister Palaniappan Chidambaram also advanced the payment of 250 billion rupees to banks for providing debt relief to farmers and said it will make finance available for lenders to raise their capital adequacy ratio to 12 percent. No bank has a capital ratio, a measure of financial health, below the central bank's 9 percent lower limit, he said.


Seeking More Liquidity

``This is a step in the right direction as liquidity is much required in the economy,'' said Y. M. Deosthalee, chief financial officer at Larsen & Toubro Ltd., India's biggest engineering company. ``The call money rates had risen sharply because banks were cash-strapped.''

These measures may free up bank lending, giving central bank Governor Duvvuri Subbarao room to resist a cut in interest rates. Inflation is still double the central bank's target even after slowing to a three-month low of 11.80 percent last month.

Besides, the 18.8 percent drop in the rupee against the dollar since January, the biggest drop since 1991, after investors sold a record $11 billion of Indian equities, may make imports costlier and negate the drop in global prices of oil, wheat and other commodities, analysts say.

The International Monetary Fund and Goldman Sachs Group Inc. cut their growth forecast for India this month because of the repercussions of the global financial crisis on the $1.2 trillion economy, Asia's third largest.

``Inflation continues to be a big worry,'' said Dharmakirti Joshi, an economist at Mumbai-based rating company Crisil Ltd. ``Maintaining a status quo on interest rates would be an appropriate response as inflation continues to be much above the Reserve Bank's expectation.''

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.