Sat, Nov 01, 2008
AFP

NEW DELHI, INDIA - INDIA'S central bank cut its key short-term lending rate on Saturday and took other monetary steps to spur lending and economic growth to counter the impact of the global financial crisis.

The Reserve Bank of India, citing 'unsettled' financial conditions, reduced its key short-term lending rate, the repo, by 50 basis points to ease a credit crunch. The repo is the rate at which it lends funds to commercial banks.

'The central bank is sending the message that it will provide stimulus for India's economy to grow by at least 7.0 to 7.5 per cent' in this financial year to March 20009, said Mr Rupa Rege Nitsure, economist at state-run Bank of Baroda.

As part of a triple-prong move, the bank also cut the amount commercial banks must keep in reserve, easing the cash reserve ratio to 6.5 per cent from 5.5 per cent - pumping billions of dollars into the financial system.

And in another stimulus step, it cut the statutory reserve ratio - the amount banks must hold in government securities - to 24 per cent from 25 per cent to boost liquidity. Banks around the world have been lowering rates to spur growth, with the US Federal Reserve on Wednesday slashing its main policy rate to one percent and neighbouring China also lowering key interest rates.

Expectations swept the stock market Friday that the bank would move soon to boost liquidity after corporate complaints that credit was extremely tight and data showed lower inflation than had been expected. But the timing was uncertain.

The bank said it took the steps 'in view of the ebbing of upside inflation risks and also to address concerns relating to the moderation in the growth momentum' and promised 'swift' further action as appropriate.

The move, announced on a Saturday when financial markets were closed, were the latest in a slew of easing steps by the bank to stabilise domestic markets which have been feeling the heat from the global crisis.

India's stock market has tumbled by 53 per cent from January highs as risk-averse foreign investors have pulled out their funds while the rupee has tumbled by nearly 20 per cent against the dollar this year to record lows.

'Global financial conditions continue to remain uncertain and unsettled, and early signs of a global recession are becoming evident,' the bank said on its web site.

'These developments are being reflected in sharp declines in stock markets across the world and heightened volatility in currency movements.'

The steps came after India's inflation rate earlier in the week fell below 11 per cent for the first time since May to hit to 10.68 per cent. Analysts forecast it will fall to single digits by Nov or Dec as a result of falling global commodity prices and slowing economic growth.

Industry bodies have been clamouring for rate cuts to ease the impact of the financial crunch on companies while the government has become concerned about the slowing of India's previously red-hot growth.

The moves reflected that the bank is 'terribly worried about growth and worried about the disruption' in lending activity and 'lack of access to credit,' said Mr Abheek Barua, chief economist at HDFC Bank.

The central bank has forecast economic growth slowing to between 7.5 and eight per cent while private economists see expansion slipping as low as seven per cent after the economy grew by nine percent last year.

While still strong, seven per cent growth is not enough to pull India's hundreds of millions of poor out deep poverty, economists say.