Reserve Bank of India Boosts Reserve Requirements But Leaves Key Interest Rates Alone

January 29, 2010

India’s cash reserve requirement of 5.0% is being raised to 5.5% on February 13 and further to 5.75% on February 27.  The combined 75-bp increase surpassed analyst expectations and is meant to help manage the economic recovery, cut excess liquidity, anchor price expectations, and help align policy instruments with the evolving state of the economy according to a statement from the central bank.  India has double-digit inflation and on-year GDP growth of about 8%.  While the key repo rate was left by authorities at 4.75% and the reverse repo rate stays at 3.25%, today’s action heralds a rise from those levels in the not-too-distant future.  Previously, the central bank rates were cut by 100 bps in October 2008, another 50 bps in November and 100 bps each in December and January.  Smaller reductions of 50 bps and 25 bps were implemented in March and April 2009, bringing the entire rate reduction to 425 basis points from a maximum repo rate of 9.0% prior to October 2008.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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