India's Subbarao Is Ready for `Swift' Steps to Boost Liquidity

By Shobhana Chandra

Oct. 11 (Bloomberg) -- Indian central bank Governor Duvvuri Subbarao said he's prepared to take ``effective'' steps to maintain liquidity in the nation's credit markets and repeated the bank's policy of smoothing swings in the currency.

We ``stand ready to take appropriate, effective and swift action'' to provide liquidity, he told reporters yesterday in Washington, where he was attending a meeting of Group of 20 finance ministers and central bankers. He said India's economy is ``strong'' and its banks are ``sound'' and ``well capitalized.''

India yesterday made the steepest cut since 2001 in the amount of cash lenders must set aside as reserves to kick-start the $1.2 trillion economy, as the rupee plunged to an all-time low and overseas investors dumped emerging-market stocks. The drop in the cash-reserve ratio followed a reduction on Oct. 6.

Subbarao, 59, declined to comment on interest-rate policy, saying that ``all variables are up for review'' at the Reserve Bank of India's Oct. 24 policy meeting. While the latest figures on inflation are ``quite comforting,'' it is ``still too early to let the vigil slip'' on prices, he said.

India's inflation has slowed to a 15-week low of 11.8 percent, according to the latest government figures, though it is still more than double the central bank's target.

Steps taken so far to improve liquidity in the Indian financial system amount to as much as $22 billion, Subbarao said.

The governor also said that in the medium term, India's rupee ``should be determined by market fundamentals.'' The RBI's policy, to ``manage exchange-rate volatility'' rather than take a view on its level, ``should continue to serve us well,'' he said.

`Knock-On Effect'

Indian markets are experiencing a ``knock-on effect'' from the global financial crisis, because the country's banks have no direct exposure to U.S. sub-prime mortgages, Subbarao said. The RBI's priorities include ``managing inflation while maintaining the growth momentum,'' and financial stability has become another objective over the last three months, he said.

Subbarao this week rushed to free up cash after money-market rates surged to an 18-month high and financial stocks slumped. ICICI Bank Ltd., the Indian lender with the biggest losses on overseas investments, dropped by a record on Oct. 10, forcing the bank to reiterate it had sufficient funds.

Some economists predict the RBI may follow central banks worldwide and cut interest rates as inflation pressures ease and the worsening global crisis begins to weaken economic growth.

``India has been cautious in its reaction until now,'' Swaminathan Aiyar, a Cato Institute research fellow with a focus on Asia, said in Washington. ``Subbarao clearly believes in balance'' between the policy objectives of growth and inflation. ``A rate cut is coming.''

Rescue Plans

Subbarao, who took over as RBI governor a month ago, said the problems and perspectives of countries directly affected by the global financial crisis are ``quite different'' from those of nations like India that are affected indirectly.

Relief and rescue plans announced by advanced countries so far don't include components in which peripheral countries such as India could participate, he said.

Still, India would ``hope to be included and involved in the design and implementation'' of such an effort, should there be a need, he said.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net