India Increases Rate on Foreign-Currency Deposits

By Kartik Goyal

Nov. 15 (Bloomberg) -- The Reserve Bank of India today announced more measures to boost cash in the financial system after cutting interest rates twice in less than a month to shield the economy from the global slowdown.

The central bank today raised the interest rate on foreign- currency deposits by 75 basis points with immediate effect, the bank said in a statement. The interest rate ceiling on the so- called foreign currency non-resident (B) deposit is now pegged at the Libor rate plus 100 basis points from an earlier cap of 25 basis points.

The central bank said it is extending until March special money auctions to meet liquidity requirements of mutual funds and non-banking finance companies.

The measures are being taken because of the current turmoil in the global financial markets that has put pressure on India's money and foreign-exchange markets, threatening to hurt the pace of economic growth, forecast by the central bank to expand at the slowest pace in four years.

``There are indications the global slowdown is deepening with a larger than originally expected impact on the domestic economy,'' the central bank said. ``In the context of developments, further augmenting the rupee and forex liquidity, strengthening credit delivery mechanisms and improving credit delivery are imperative for sustaining the growth momentum.''

Non-Resident Accounts

The central bank also raised interest rate cap on non- resident rupee accounts by 75 basis points to the Libor rate plus 175 basis points, the statement said.

Today's announcement comes after the central bank cut its benchmark lending rate twice since Oct. 20, lowering it to 7.5 percent from a seven-year high of 9 percent. It also pared the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as 1.4 trillion rupees ($29.5 billion) in cash to ease lending.

The bank also allowed housing-finance companies to raise short-term foreign-currency loans and said it will consider proposals from Indian companies to buy back foreign-currency bonds they issued.

To help exporters fighting the slowdown in demand from the U.S., the central bank agreed to extend the period for rupee loans to 270 days from 180 days.

Export Growth Eases

India's exports grew 15 percent in September, the slowest pace in 18 months, as the weakening global economy damped demand. Overseas shipments, which account for about 15 percent of the economy, rose 10.4 percent to $13.7 billion from a year earlier, after gaining 27 percent in August.

To meet the credit demand of small and micro industries and the housing industry, the central bank said Small Industries Development Bank of India and National Housing Bank will get 20 billion rupees and 10 billion rupees, respectively.

The bank also reduced the risk provisioning for the commercial real-estate industry to 100 percent from 150 percent earlier.

``The Reserve Bank will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate,'' the statement said.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net