India cuts rates to boost growth

Mumbai: India's central bank yesterday slashed its key interest rates by one percentage point to boost growth and shore up investor confidence amid signs of economic slowdown and in the wake of deadly attacks in Mumbai.

The decision came a day after the government cut state-set fuel prices for the first time in nearly two years and ahead of expected fiscal measures to keep Asia's third-largest economy expanding, just as manufacturing activity is slowing down.

Following rate cuts across Asia, in the UK and the euro zone last week, the Reserve Bank of India (RBI) lowered its key lending rate, or repo rate, by 100 basis points to 6.5 per cent, its lowest rate in two-and-a-half years.

Economists said the cuts, which were in line with expectations, were a clear positive for the economy and for markets, which were shut yesterday but have been pummelled by the global financial crisis .

"For the economy to rev up, we now need fiscal measures to focus on sector-specific issues," Shubhada Rao, chief economist at Yes Bank, said.

The reverse repo rate, the rate at which the central bank absorbs excess cash from the system, falls to five per cent from six per cent, its lowest in more than three years. Both rate cuts take effect on Monday.

Drop

The main lending rate has now been cut by 250 basis points since October 20, when the RBI made its first rate cut in more than four years to shield India from the global turmoil.

Expectations of rate cuts mounted ever since the terrorist attacks in Mumbai on November 26. RBI Governor Duvvuri Subbarao told a news conference on Saturday the economic impact of the attacks was hard to estimate. "I am hopeful and confident that we will be able to return to normalcy, make an adjustment and our business and industries will continue their regular activity notwithstanding the terrorist attack," Subbarao said.

The benchmark 10-year bond yield fell 31 basis points to 6.76 per cent last week ahead of the central bank's decision, which had been well-flagged by government officials.

India had hoped to avoid the worst of the global financial crisis, with demand largely domestic driven and growth an impressive nine per cent in the fiscal year which ended last March.

But economists say expansion may slow to seven per cent this fiscal year and some even predict a drop below six per cent in 2009-10, and the government wants to keep the economy buoyed as the country heads into national elections due by May.

Along with the rate cuts, the central bank took steps to boost credit delivery to small industries, tweaked regulations to improve lending to real estate and put a cap on the cost of some export credit.

"The cumulative impact of the measures in today's package, together with earlier measures, should be to step up demand and arrest the growth moderation," Subbarao said. The central bank left its reserve requirement for banks' unchanged at 5.5 per cent.