Emerging Markets Roundup: India


By Aaron Chaze

The Reserve Bank of India (RBI) cut interest rates for the first time in nine months on January 30, reducing the repo rate by 25 basis points to 7.75%.

However, in a surprise move it also reduced the cash reserve ratio (CRR) for banks by 25 basis points to 4.0%, signaling to banks the need to expand credit at a lower cost and that it was more concerned with growth than inflation.

The reduction in the CRR is expected to inject $3.5 billion of additional liquidity into the Indian economy. The rate and reserve ratio cuts come just as the RBI lowered the GDP growth estimate to 5.5% from 5.8% for the 2012–2013 fiscal year ending in March. The RBI also expects inflation to moderate to 6.8% from 7.5% by the end of the year. There is increased expectation now of a further 25-basis-point rate cut by the RBI in March.

Following the cut in interest rates and release of additional liquidity, foreign institutional investors pumped $3.2 billion into Indian public equities in the first week of February alone. FIIs invested $7.3 billion net during the first five weeks of 2013, compared with a total of $6.6 billion for the first two months of 2012 and a total of $24.4 billion invested into Indian equities during calendar 2012. The 2012 flows followed an outflow of $500 million during 2011.