India's central bank ordered banks to set aside more money to cool lending, adding to government efforts to rein in inflation running near a three-year high.
The Reserve Bank of India will raise the cash reserve ratio to 8 percent from 7.5 percent in two phases by May 10, according to a statement in Mumbai yesterday. The increase, the first in 2008, will drain as much as 185 billion rupees ($4.6 billion) from the financial system.
India's inflation rate has more than doubled in the past four months amid soaring commodity and food prices, undermining support for Prime Minister Manmohan Singh's Congress party ahead of election due in a year's time. The central bank's move came a day after China, fighting to tame 11-year-high inflation, also told commercial lenders to set aside more cash.
``Given the huge political importance of inflation'' in India, we expect the Reserve Bank ``will continue its tightening measures,'' said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc. ``The guiding principle would be to arrest inflationary expectations and further slow demand.''
The central bank said India's cash reserve ratio would be raised to 7.75 percent starting April 26 and to 8 percent effective May 10. The People's Bank of China increased the required reserve ratio to a record 16 percent.
Prime Minister Singh's Congress party, which was defeated in five of seven state polls in 2007 and failed to secure power in three this year, needs to curb prices to bolster its electoral prospects.
Interest Rates
Reserve Bank Governor Yaga Venugopal Reddy has raised the central bank's key policy interest rates nine times since October 2004 and the cash reserve ratio five times since December 2006 until yesterday.
The level of inflation is unacceptable and the central bank will announce a response in its April 29 monetary policy statement, Reddy said on April 15.
``The cash reserve ratio increase has come at a very right time,'' said Krish Ramkumar, who manages the equivalent of $1.1 billion in Indian debt at Sundaram BNP Paribas Asset Management in Mumbai. ``I still expect the repurchase rate to be hiked to 8 percent from 7.75 percent'' in this month's policy statement.
Yesterday's increase came after several fiscal measures by the government earlier this month, including bans on the export of some food staples such as pulses and types of rice.
Slower Growth
Finance Minister Palaniappan Chidambaram said in parliament this week that apart from fiscal measures, cracking down on hoarding and price cartels, inflationary expectations had to be quelled by reducing liquidity and tempering demand.
India's inflation rate was 7.14 percent in the week ended April 5 from a year earlier, after gaining 7.41 percent in the previous week, the Ministry of Commerce and Industry said in New Delhi yesterday. Economists had expected a 7.23 percent increase.
``The worst seems to be over for inflation,'' said Prasanna Ananthasubramaniam, a fixed-income analyst at ICICI Securities Ltd. in Mumbai. ``Bond yields should peak out now.''
Benchmark bond yields climbed to the highest level since June yesterday after crude oil's surge to a record stoked concern inflation will quicken further. The yield on the 7.99 percent note due July 2017 rose 4 basis points to 8.12 percent at the close in Mumbai. The cash reserve ratio announcement was made after trading ended.
There may be some respite from rising prices if the monsoon forecast is borne out.
India's monsoon rains are expected to be sufficient this year for farmers to plant rice, wheat and oilseeds, Science and Technology Minister Kapil Sibal said April 16. That may reduce the nation's dependence on imports and help stave off pressure on global food prices, which have caused social unrest in 33 countries from Mexico to Yemen.
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