By M.C. Govardhana Rangan Oct. 7 (Bloomberg) -- State Bank of India and ICICI Bank Ltd., the nation's two biggest, rose after the central bank unexpectedly said lenders can set aside smaller reserves for the first time in five years to boost cash in the financial markets. The Reserve Bank of India reduced its so-called cash reserve ratio to 8.5 percent from 9 percent effective Oct. 11. The measure will add 200 billion rupees ($4.2 billion) to the financial system, the central bank said yesterday. State Bank rose 3 percent to 1,477 rupees and ICICI Bank gained 4.3 percent to 511.2 rupees at 9:57 a.m. local time in Mumbai trading. Reserve Bank of India Governor Duvvuri Subbarao freed up cash to banks as a mounting global credit crisis has frozen bank lending and battered financial stocks. The move may lift Indian bank earnings that had been squeezed as the central bank raised borrowing costs to tackle inflation. ``The 50 basis points cut will provide a 3-5 percent uplift to banks' earnings,'' Macquarie Securities Ltd. analysts including Seshadri Sen wrote in a note to clients today. ``The cut could drive a minor easing in deposit and lending rates.'' The bank had lifted the key repurchase rate by 300 basis points to 9 percent since 2004 and raised the cash ratio by 400 points since Dec. 2006. That series of rate increases led to higher borrowing costs for banks and slower demand for home and automobile loans, hurting their profitability. ``RBI's action would likely boost share price performance of banks in the near-term given the favorable impact on earnings,'' Goldman Sachs Group Inc. analysts including Sampath Kumar wrote in a note to clients yesterday. ``However, we maintain a cautious stance on financials due to rising headwinds to earnings growth over the medium-term driven by slower loan growth, tougher outlook for net interest margin and deterioration in asset quality.'' To contact the reporters on this story: M.C. Govardhana Rangan in Mumbai at grangan@bloomberg.net.

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