New Delhi: The government may cut the amount of cash banks need to set aside as reserves again if the financial crisis triggered by the collapse of lenders in the US and Europe deepens, Goldman Sachs Group Inc. and JPMorgan Chase and Co. said.

The Reserve Bank of India (RBI) on Monday reduced the cash reserve ratio (CRR) to 8.5% from 9% effective 11 October. The move will inject Rs20,000 crore into the financial system and came as the capital markets regulator Securities and Exchange Board of India (Sebi) lifted curbs on overseas investors imposed a year ago.

India’s regulators are concerned that a shortage of money with banks that sent overnight borrowing rates to an 18-month high last week will exacerbate a stock market slump that’s driven the rupee to a five-and-a-half-year low.

With care: RBI governor D. Subbarao. The central bank on Monday cut CRR to 8.5%, a move that will inject Rs20,000 crore in the economy. Tomohiro Ohsumi / Bloomberg

There will be “further moves by the RBI to relax the cash reserve ratio" if global financial conditions worsen, said Tushar Poddar, a Mumbai-based economist at Goldman. “With inflation still hovering around 12%, we do not think that the RBI is ready, as yet, to cut the repurchase rate."

RBI has raised the benchmark repurchase rate at which it lends by 125 basis points since April to cool inflation stoked by rising commodity prices. The central bank had last raised the rate by half-a-percentage point to 9% on 29 July.

One basis point is one-hundredth of a percentage point.

Foreign investors, who had bought a record $17.2 billion (Rs82,560 crore today) of Indian stocks last year, are now fleeing the nation’s $1.2 trillion economy after it grew 7.9% last quarter, the slowest pace since 2004.

They pulled out a record $9.3 billion since January, stoking a 40% decline in the benchmark index, the Sensex, of the Bombay Stock Exchange, and causing the rupee to drop 17.5% this year.

The Sensex lost 106.46 points, or 0.90%, to close at 11,695.24 on Tuesday. The index had dropped 10% in the previous two trading days.

The rupee continued its slide, falling past 48 per dollar for the first time in more than five years, while the yield on the benchmark 10-year bonds fell 13 basis points to 8%.

Call money rates, which have averaged 8.21% in the past six months, fell to 10.75%.

Money market rates have climbed worldwide as banks hoarded cash on speculation the seizure in credit markets is deepening and may prompt more financial institutions to collapse and spin the global economy into a recession.

The US Federal Reserve on Monday said it will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets.

Australia’s central bank cut its benchmark interest rate by 1 percentage point on Tuesday, the biggest reduction since a recession in 1992, to cushion the nation’s economy against fallout from a global credit freeze.

The Bank of Japan said the country’s economic growth will remain “sluggish", and injected 1 trillion yen (Rs47,000 crore) into its money market.

The London interbank offered rate that banks charge each other for overnight dollar loans rose 37 basis points to 2.37% on Monday, the British Bankers’ Association said.

The three-month rate stayed near the highest level since January.

With funds drying up in India’s financial system as well, economists are paring expectations of a further increase in interest rates by RBI to check inflation.

“Given the tight liquidity situation and following yesterday’s (Monday’s) move, we remove our expectation of a hike in the policy rate and expect the central bank to announce another CRR cut, conditional on the liquidity situation," said Gunjan Gulati, an economist at JPMorgan in Mumbai.

Sebi on Monday removed a requirement that forced investors to register in India before buying shares. The regulator also scrapped limits on offshore derivatives.

“Investor sentiment will improve because liquidity had been tight in the domestic market long enough and was probably on the verge of creating undesired results," said Parthasarathi Mukherjee, president of treasury at Axis Bank Ltd. “Global liquidity tightness made such a move necessary."

Debarati Roy in Mumbai and Subramaniam Sharma in New Delhi contributed to this story.