JAKARTA — India’s central bank announced on Friday a complex series of changes to its interest rate policies, aimed at maintaining control of inflation while also making credit more available to the troubled industrial sector.
The Reserve Bank of India cut by three-quarters of a percentage point the short-term interest rate that has had the most effect on bank lending rates lately, while, in an unexpected move, raising by a quarter of a percentage point a separate interest rate that many banks rely on for their underlying financing.
The United States Federal Reserve’s decision on Wednesday not to begin decreasing its level of economic stimulus has given India a respite during which to pursue slightly less stringent monetary policies of its own. The Reserve Bank of India tightened policy sharply in mid-July in an effort to halt the fall of the rupee in currency markets.
The rupee continued to drop until the end of August, when a move by the central bank to provide dollars from its reserves to the country’s state-controlled oil distribution companies finally halted the tumble. The rupee and the Indian stock market, like currencies and shares in other emerging markets, rallied sharply on Thursday after the Fed’s decision on Wednesday.
The Reserve Bank of India has two short-term interest rates. Commercial banks are allowed to borrow part of their funds at the repurchase, or repo, rate, which was raised on Friday to 7.5 percent, from 7.25 percent.
Many in the Indian financial markets have long focused on the repo rate, even though it has been less important lately, and were disappointed to see it rise instead of fall on Friday.
“India’s core inflationary requirements mean that the market can no longer expect a complete rollback of interest rates,” said Vaibhav Agrawal, vice president for research and banking at Angel Broking.
Further borrowing by commercial banks comes from the so-called marginal standing facility, whose interest rate was cut on Friday to 9.5 percent, from 10.25 percent. Because the cost of borrowing for banks to make additional loans is essentially the interest rate on the marginal standing facility, that rate tends to have a greater effect on the interest rates that banks charge customers for loans.
The reduction of the marginal standing facility by 0.75 percentage point “is encouraging, as this is working as the short-term interest rate,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.
After the central bank’s action, the Mumbai stock exchange sagged 1.9 percent, wiping out much of the gain it had posted the previous day. The rupee fell to 62.44 per dollar, from about 62 just before the announcement.
While short-term interest rates may sound high in India, they are only slightly above inflation, with prices up 9.5 percent in August from a year ago at the consumer level and up 6.1 percent at the wholesale level.
Neha Thirani Bagri contributed reporting from Mumbai.
Article source: http://www.nytimes.com/2013/09/21/business/global/india-adjusts-short-term-interest-rates.html?partner=rss&emc=rss