The central bank should act to ease credit concerns, say companies.
India’s central bank should make more cash available to lenders to ease a credit shortage and restore investor confidence, executives at Alok Industries, Jaiprakash Associates and Balrampur Chini Mills said.
The Reserve Bank of India needs to cut the cash reserve ratio, the proportion of deposits banks must hold at the central bank, from an eight-year high of 9 percent before its next meeting Oct. 24, they said, predicting reductions of between 50 and 100 basis points.
Indian money market rates have risen to near an 18-month high as banks hoard cash and investors pull out from emerging markets to meet a deepening financial crisis. The central bank, seeking to allay concern in the market, said today the nation’s second-biggest bank has sufficient cash.
“It is imperative the Reserve Bank of India should lower the cash reserve ratio to take off the pressure immediately,’’ said Sunil Khandelwal, chief financial officer at textile exporter Alok Industries. “Some industries may not be able to withstand this pressure and make the situation worse than it is. So, timely infusion needs to be made.’’ The central bank should cut the cash reserve ratio by 100 basis points, he said.
Commercial banks worldwide are refusing to lend to each other after the U.S. housing slump caused the collapse of New York-based Lehman Brothers Holdings Inc. and forced governments to bail out financial institutions in the U.S. and Europe. Banks borrowed the most since 2002 at the European Central Bank’s emergency rate and deposited a record 44.4 billion euros ($64 billion) as money markets remained frozen.
'Restore confidence’
“There is a need to restore the confidence level and there is no panic,’’ said Harish K. Vaid, senior president, corporate affairs and company secretary, Jaiprakash Associates, India’s biggest builder of dams. Vaid also expects the Reserve Bank to lower the cash reserve ratio by 100 basis points.
The bank has raised the cash ratio by 400 basis points since December 2006 to prevent excess money in the banking system from stoking inflation. A basis point is 0.01 percentage point. Alpana Killawala, Mumbai-based spokeswoman of the Reserve Bank, declined to comment.
The ratio may be cut by 50 basis points, said Kishor Shah, a director and chief financial officer of Balrampur Chini, India’s second-largest sugar producer.
“The problem with Indian companies is that they are in a huge liquidity crunch,’’ said Shah.
Well capitalised
Finance Minister Palaniappan Chidambaram said today Indian banks are well capitalised and a $700 billion bailout package that was rejected by U.S. lawmakers yesterday would help markets worldwide if approved.
The rupee closed at an two-year low of 46.985 per dollar yesterday, according to data compiled by Bloomberg. The yield on the benchmark bond rose 3 basis points to 8.62 percent yesterday, near a month’s high, according to the central bank’s trading system. India’s bond and currency markets are shut today for fiscal half-year account closing.
Overseas investors have sold a record $9.22 billion of Indian shares this year, sending the benchmark Sensitive index down for three straight quarters, the longest losing streak in seven years. The Bombay Stock Exchange’s benchmark Sensitive Index gained 2.1 percent to 12,860.43.
ICICI Bank Ltd., India’s second-biggest, rose 9.3 percent to 539 rupees after the lender and the Reserve Bank said in separate statements it has sufficient funds.
SLR cut
The central bank will probably cut the statutory liquidity ratio, the proportion of deposits banks have to keep in the form of low-risk securities, before the cash reserve ratio because inflation is still high, Rajeev Malik, regional economist at Macquarie Group in Singapore said.
“Statutory liquidity ratio has been a structural constraint that needs to be addressed,’’ said Malik. “Cash reserve ratio cuts will come but not just yet.’’
The rate of inflation in Asia’s third-largest economy tripled this year to 12.14 percent in the first week of this month. The rate touched 12.63 percent, the highest since 1992, in August. “The Reserve Bank would keep a watch on inflation’’ before taking a decision on easing monetary policy, Suresh Tendulkar, top economic adviser to Prime Minister Manmohan Singh, said in an interview today. The monetary authority has already started adding liquidity by holding additional daily money auctions.
The author is a Bloomberg News columnist. The opinions expressed are his own.
