Finance Minister Palaniappan Chidambaram yesterday said the government will act against cartels and is prepared to sacrifice revenue to help contain price gains. Faster inflation, fuelled by soaring commodity and food costs, will impede growth and slow poverty reduction, according to Prime Minister Manmohan Singh.
India's central bank also told lenders to set aside more deposits as reserves starting next week to temper inflation that's running near a three-year high.
Cash Reserve Ratios Up
The Reserve Bank of India increased the so-called cash reserve ratio to 7.75 percent starting April 26 and to 8 percent effective May 10 from 7.5 percent now. The decision will drain as much as 185 billion rupees ($4.6 billion) from the banking system, the central bank said in a faxed statement in Mumbai today.
The increase is the first in 2008 and comes after several fiscal measures by the government earlier this month, including bans on the export of some food staples.
Before today's decision Reserve Bank Governor Yaga Venugopal Reddy had raised the central bank's key policy rates nine times since October 2004 and the cash reserve ratio five times since December 2006.
Draining cash from banks will help check consumer demand and prevent inflation, driven up by food and commodity prices, from accelerating. The step compliments the fiscal measures announced by the government to cool price gains ahead of elections in a year's time.
India also plans to import 1 million metric tons of edible oils to curb prices as demand rises amid a shortfall in the domestic crop, Agriculture Minister Sharad Pawar said yesterday. The government will also import more pulses in an attempt to cool prices.
The yield on India's benchmark bonds climbed to the highest since June. The yield on the 7.99 percent note due July 2017 rose 4 basis points to 8.12 percent as of the 5:30 p.m. close in Mumbai. The price fell 0.23, or 23 paise per 100 rupee face amount, to 99.17. A basis point is 0.01 percentage point.
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