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BLBG: India May Cut Reserve Ratio, Goldman, JPMorgan Says (Update1)
By Cherian Thomas and Kartik Goyal

Oct. 7 (Bloomberg) -- India may cut the amount of cash banks need to set aside as reserves again if the financial crisis triggered by the collapse of lenders in the U.S. and Europe deepens, Goldman Sachs Group Inc. and JPMorgan Chase & Co. said.

The Reserve Bank of India yesterday reduced the cash reserve ratio to 8.5 percent from 9 percent effective Oct. 11. The move will inject 200 billion rupees ($4.2 billion) to the financial system and came as the capital-markets regulator lifted curbs on overseas investors imposed a year ago.

India's regulators are concerned that a shortage of money with banks that sent overnight borrowing rates to an 18-month high last week will exacerbate a stock-market slump that's driven the rupee to a 5 1/2-year low. New Governor Duvvuri Subbarao may not cut interest rates soon because inflation is still at more than double the central bank's target.

There will be ``further moves by the RBI to relax the cash reserve ratio'' if global financial conditions worsen, said Tushar Poddar, a Mumbai-based economist at Goldman. ``With inflation still hovering around 12 percent, we do not think that the RBI is ready, as yet, to cut the repurchase rate.''

The Reserve Bank has raised the benchmark repurchase rate at which it lends by 125 basis points since April to cool inflation stoked by rising commodity prices. The bank last raised the rate by a half a percentage point to 9 percent on July 29.

Foreign Investors

Foreign investors, who bought a record $17.2 billion of Indian stocks last year, are now fleeing the nation's $1.2 trillion economy after it grew 7.9 percent last quarter, the slowest pace since 2004. They pulled out a record $9.3 billion since January, stoking a 40 percent decline in the benchmark stock index and causing the rupee to drop 17.5 percent this year.

The Sensitive Index gained 2.6 percent to 12,102.78 at 10:00 a.m. local time, reversing a 10 percent drop in the previous two trading days. The rupee continued its slide, falling past 48 per dollar for the first time in more than five years, while the yield on the benchmark 10-year bonds fell 13 basis points to 8 percent. Call money rates, which have averaged 8.21 percent in the past six months, fell to 10.75 percent.

Money-market rates have climbed worldwide as banks hoarded cash on speculation the seizure in credit markets is deepening and may prompt more financial institutions to collapse and spin the global economy into a recession.

The U.S. Federal Reserve yesterday said it will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets.

Australia's central bank cut its benchmark interest rate by one percentage point today, the biggest reduction since a recession in 1992, to cushion the nation's economy against fallout from a global credit freeze.

Bank of Japan

The Bank of Japan said the country's economic growth will remain ``sluggish,'' and injected 1 trillion yen ($9.8 billion) into its money market.

The London interbank offered rate, or Libor, that banks charge each other for overnight dollar loans rose 37 basis points to 2.37 percent yesterday, the British Bankers' Association said. The three-month rate stayed near the highest level since January.

With funds drying up in India's financial system as well, economists are paring expectations of a further increase in interest rates by the Reserve Bank to check inflation.

``Given the tight liquidity situation and following yesterday's move, we remove our expectation of a hike in the policy rate and expect the central bank to announce another CRR cut, conditional on the liquidity situation,'' said Gunjan Gulati, an economist at JPMorgan in Mumbai.

The Securities & Exchange Board of India yesterday removed a requirement that forced investors to register in India before buying shares. The regulator also scrapped limits on offshore derivatives.

``Investor sentiment will improve because liquidity had been tight in the domestic market long enough and was probably on the verge of creating undesired results,'' said Parthasarathi Mukherjee, president of treasury at Axis Bank Ltd. ``Global liquidity tightness made such a move necessary.''

To contact the reporter on this story: Kartik Goyal in New Delhi at cthomas1@bloomberg.net; Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.