Indian cash rates up, authorities agree more steps

The benchmark 10-year bond yield jumped to 8.04 percent from Tuesday's close of 7.94 percent as market speculation intensified that in order to free up extra cash the central bank may cut the proportion of deposits that banks must invest in government debt.

Such a move would limit demand for government bonds. The central bank already slashed the percentage of deposits it requires banks to hold in cash reserves on Saturday and traders were also not ruling out another reserve requirement cut as well.

Finance Minister Palaniappan Chidambaram told a briefing in New Delhi that interbank lending remained constrained and it was necessary to overcome those constraints. [ID:nDEL357212].

"The government and the RBI (Reserve Bank of India) are agreed on the measures that have to be taken immediately," he said without detailing the steps. But he added he expected to brief journalists again later in the day.

The statutory liquidity ratio (SLR) is the ratio of government bonds that banks must hold as a percentage of their total deposits and it currently stands at 25 percent.

"With the finance minister's statement, expectations that the SLR may be cut have resurfaced," a dealer with a state-run bank said.

Some traders speculated the central might again lower its cash reserve ratio, after the latest cut to 7.5 percent released about $12 billion into the system, or lower both requirements.

Another option for the central bank was to redeem special intervention bonds prematurely to inject more cash.

The Reserve Bank of India injected 362.70 billion rupees into the money market at its morning liquidity operations and said it would offer a special funding window, introduced on Tuesday to help mutual funds meet their liquidity needs, on a daily basis until the cumulative limit of 200 billion rupees ($4.1 billion) was reached.

But overnight interbank lending rates remained a full percentage point above the central bank's main short-term lending rate of 9 percent, after closing at 8.75/9.00 percent on Tuesday.

The partially convertible rupee INRIN was 0.8 percent down on the day at 48.41/42 per dollar even though traders reported dollar selling by state-run banks, probably to shore up the currency after it hit a record low of 49.30 on Friday.

A money market dealer at a foreign bank said the heavy dollar selling by state-run banks had added to the cash crunch.

The rupee came has been under pressure from expectations that foreign investors would pull out from India's stock market, as share markets across Asia fell on expectations a weakening global economy would hit corporate earnings. The benchmark share index .BSESN was down 3.7 percent by midsession.