India in unexpected rate cut

India's central bank unexpectedly cut its key lending rate for the second time in two weeks Saturday and took other steps to spur economic growth and counter fallout from 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 to 7.5 percent" in this financial year to March 20009, said Bank of Baroda economist Rupa Rege Nitsure.

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 5.5 percent from 6.5 percent - 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 percent from 25 percent to boost liquidity for the first time in over a decade.

Banks around the world have been lowering rates this week with the US Federal Reserve slashing its main policy rate to one percent, neighbouring China also lowering key interest rates and the Bank of Japan cutting its key overnight lending rate.

The Confederation of India Industry called the Reserve Bank of India's steps "supportive of growth".

Expectations swept the stock market Friday the bank would move soon to boost liquidity after corporate complaints that credit was extremely tight and data showed lower than expected inflation. 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 steps came after India's inflation rate fell below 11 percent for the first time since May to 10.68 percent. Analysts forecast it will slip to single digits by November or December as a result of falling global commodity prices and slowing economic growth.

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

India's stock market has tumbled by 53 percent from January highs as risk-averse foreign investors have pulled out their funds while the rupee has tumbled by nearly 20 percent 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.

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

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

The bank has forecast growth slowing to between 7.5 and 8 percent while private economists see expansion slipping as low as seven percent after the economy grew by 9 percent last year.

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