India's overnight lending rate leaped above 20 percent on Friday as banks stashed cash ahead of a government bond sale, squeezing rates to their highest since the global crisis broke in earnest over India earlier this month.
Stocks soared 9 percent and bond yields, which move inverse to prices, fell as expectations built that India's central bank would cut policy rates after the Federal Reserve and the People's Bank of China lowered theirs this week to cushion the economic impact of the global financial crisis.
The 10-year bond yield slid 8 basis points to 7.43 percent, its lowest since February, as speculation mounted the central bank might take liquidity-injecting steps or ease its key lending rate after a surprise 100 basis point rate cut on October 20.
In New Delhi, the finance minister said the global slowdown would have an indirect effect on the Indian economy, and banks, already short of cash, were reluctant to lend ahead of the 100 billion rupee ($2 billion) debt auction later in the day. As well as cutting its lending rate, the Reserve Bank of India has scythed a total 250 basis points off its cash reserve ratio, the proportion of deposits banks must keep in reserve, after overnight rates soared to 23 percent three weeks ago.
The CRR now stands at 6.5 percent after a series of hurried measures by the government and central bank to pump cash into the banking system as the global credit crisis hampered Indian banks' ability to raise cash at home and abroad.
Inflation, which hit an annual rate of 12.91 percent in August, eased to 10.68 percent by mid-October, its lowest in 4-1/2 months, and analysts say it could be in single digits before the end of 2008. Overnight cash rates jumped to 20.00/21.00 percent from Wednesday's close of 13.00/13.50 percent as outflows resulting from a treasury.
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