Asia Weekly

India Vows to Protect Growth

Week Ended: November 7, 2008

This week Prime Minister Manmohan Singh said his government would take all necessary monetary and fiscal steps to shield growth in Asia's third-largest economy. Indian families tend to be savings oriented, and the average savings ratio is about 30% of income per household. In an attempt to unlock some of those savings and sustain the current growth momentum, India’s central bank, the Reserve Bank of India, has been proactively boosting liquidity recently. In a matter of weeks, the RBI cut its cash reserve ratio by 3.5%, and lowered the headline benchmark interest rate by 1.5%. In another move, the RBI lowered the quantity of government bonds required to be held by commercial banks (also known as the statutory liquidity ratio or SLR) from 25% of their deposits to 24%. These measures should free up more than US$35 billion of much-needed bank capital to be deployed in the private sector, and should help improve liquidity.

India’s economy has always lacked capital—the availability of capital has not been commensurate with the country’s size and growth potential. Last year, the total foreign equity capital inflow received by India from April-June across various channels (foreign institutional investment and foreign direct investment) was US$9.7 billion, which fell further to US$4.9 in 2008 due to outflows of global capital. Not long ago, the RBI was battling high inflation, driven primarily by rising global commodity prices. As worldwide commodity prices started to fall, India’s inflation also began cooling off. This prompted the central bank to refocus on growth. In response, many public sector banks are now starting to cut lending rates. At the same time, India’s substantial US$258 billion foreign exchange reserves lend some reassurance over the country’s ability to manage its balance of payments without greatly impacting its currency.

Over the past few years, India’s central bank has arguably been among the more proactive in the region in terms of monetary policy. The latest measures, when seen in the context of easing by Asia’s other central banks, the recent falls in commodity prices and underlying inflationary pressures, underscore the shift in policy to a much looser stance across the region.

 

 

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The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information.