India Adjusts Short-Term Interest Rates

JAKARTA â€" 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 somewhat more available to the country’s 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 raising by a quarter of a percentage point a separate interest rate that many banks rely on for their underlying financing.

The Federal Reserve’s decision on Wednesday not to begin tapering 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 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 Reserve 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 other emerging markets, rallied sharply on Thursday after the Fed’s decision this week.

The Reserve Bank has two short-term interest rates. Commercial banks are allowed to borrow part of their funds at the repo rate, which the Reserve Bank raised on Friday to 7.5 percent, from 7.25 percent.

Many in 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 marginal standing facility, for which the Reserve Bank cut the interest rate 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 Reserve Bank’s action, the Mumbai stock exchange sagged more than 2.5 percent, wiping out much of the gain it posted the previous day. The rupee fell to 62.44 per U.S. dollar, from about 62.00 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.

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