India made the steepest cut since 2001 in the amount of cash lenders need to set aside as reserves to cushion the economy from a global slowdown, after the rupee slumped to a record low and overnight lending rates doubled.With that statement by Finance Secretary Arun Ramanathan, India joins the grown ranks of governmental fools that have no freaking idea what the problem even is.
The Reserve Bank of India lowered the cash reserve ratio to 7.5 percent from 9 percent effective tomorrow. The measure will release 600 billion rupees ($12.2 billion) into the financial system, the bank said in a statement in Mumbai.
"This move is aimed at addressing the sharp decline in liquidity in capital and money markets," said N. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. "A cut in interest rates runs the risk of a further weakening of the currency."
"We have identified that the main problem is liquidity," Finance Secretary Arun Ramanathan said in New Delhi. "We have assured the people that we will respond swiftly and take steps to infuse more liquidity according to the needs of the situation."
The problem is solvency, not liquidity, and the root cause is fractional reserve lending. So what does India do? Lower reserve requirements of course, in a foolish attempt to stimulate lending when there is clearly insufficient capital to lend.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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