India Plans to Increase Liquidity, Driving Stock, Rupee Gains

By Cherian Thomas

Oct. 13 (Bloomberg) -- Finance Minister Palaniappan Chidambaram said India plans to increase the amount of cash in the financial system, lifting the rupee from a record low and shares after the biggest drop in 18 years last week.

``The root cause of the present uncertainty is liquidity and not any dramatic change in the fundamentals of the economy,'' Chidambaram said in New Delhi today. ``We are working on more measures that will infuse liquidity and increase the confidence of depositors and investors.''

India's central bank may further cut the amount of cash banks need to set aside as reserves as the tightest credit crunch in 19 months threatens to stall economic growth. Indian stocks led by ICICI Bank Ltd. mirrored gains across Asia today as Australia guaranteed bank deposits while European leaders agreed to support lenders in an effort to restore investor confidence.

``There has to be a sustained effort to calm markets because these are very unusual times,'' said Sujan Hajra, chief economist at Anand Rathi Securities Pvt. in Mumbai. ``A deeper cut in the cash reserve ratio is most likely in India, where the problem is one of liquidity.''

The government, the Reserve Bank of India and the Securities & Exchange Board of India are working on more steps, Chidambaram said, without elaborating. ``We hope to be able to announce them shortly,'' the finance minister said in a televised briefing before the stock market opened.

Markets Rally

India's benchmark Bombay Stock Exchange Sensitive Index, or Sensex, surged 6.3 percent to 11,186.35 after a 16 percent plunge last week. ICICI Bank climbed by a record, reversing its biggest ever drop on Oct. 10, after Chief Executive Officer K.V. Kamath said the nation's second-biggest lender had sufficient funds.

ICICI Bank is being targeted by short sellers who have spread rumors that the bank may struggle to refund depositors, Kamath told NDTV Profit news channel today. India should consider a ban on short sales, he said. Short sellers borrow stock and sell it, hoping to buy it back at a lower price.

The rebound in the markets came after the Reserve Bank of India reduced the cash reserve ratio, or the amount of money lenders need to keep aside as reserves, to 7.5 percent from 9 percent starting Oct. 11. The cut was the sharpest since 2001.

The rupee rose 0.7 percent to 48.10 per dollar, snapping a five-day losing streak, while bond yields on the key 10-year bonds declined 5 basis points to 7.74 percent. Overnight money markets rates fell to 9.85 percent today from 16 percent on Oct. 10, the highest since March 2007. A basis point is 0.01 percentage point.

`Nothing to Fear'

Indian banks are ready to provide credit, are safe and depositors have nothing to fear, Chidambaram said, adding he may make another statement today if needed. A panel set up by the finance ministry panel on liquidity will meet at 3:30 p.m.

Still, Indian real-estate developers will continue to face a shortage of funds even after the central bank cut the amount of cash banks need to hold to ease credit, Macquarie Research said in a note to clients today.

``The capital crunch has hit the sector very hard,'' Macquarie analysts Unmesh Sharma and Bharat Rathi said. ``We believe the tightness will continue for a few more months, given the difficulty in raising capital through bank debt, equity markets and (more recently) private equity.''

The tight money market conditions have emerged at a time when India's industrial output growth has slumped to the weakest pace in at least 14 years. Output at factories, utilities and mines rose 1.3 percent in August from a year earlier after a revised 7.4 percent gain in July, as rising borrowing costs since 2004 to contain inflation sapped consumer demand.

The central bank has increased its key repurchase rate by 3 percentage points to 9 percent since 2004 and the cash reserve ratio by 4 percentage points since December 2006, before last week's cuts in the reserve ratio.

Slowing Growth

The $1.2 trillion economy may slow to 7.9 percent in 2008 and slide further to 6.9 percent in 2009, the International Monetary Fund said this month, as it described the world economy as being ``on the cusp'' of a recession. The IMF estimates India's economy grew 9.3 percent in 2007.

``There is a need to switch the monetary policy stance towards growth because inflation is ebbing,'' said Suresh D. Tendulkar, chairman of the panel of economic advisers to Prime Minister Manmohan Singh. Tendulkar also called for easing restrictions on local companies raising funds overseas.

Inflation in the nation may ease from the current 15-week low with prices of crude oil, wheat and other commodities tumbling as the world economy heads toward a recession.

India's key wholesale price inflation rate fell to 11.80 percent in the week to Sept. 27, the government said Oct. 10, slower than economists expected. Chidambaram said the drop in prices of metal and oil, currently near a 13 month low of $77.7 a barrel, will have a ``beneficial'' effect on inflation.

-- With reporting by Sumit Sharma in Mumbai. Editors: Stephen Foxwell, Nabeel Mohideen.

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