India’s central bank cuts key interest rates

December 7, 2008

MUMBAI, India (AP) — India’s central bank slashed key interest rates by 1 percentage point Saturday amid signs of slowing economic growth and damaged investor confidence following the recent terror attacks in Mumbai.

The cut, to take effect Monday, will bring the benchmark repo rate, at which the central bank makes short-term loans to commercial banks, from 7.5 percent to 6.5 percent. That’s the lowest since June 2006 and down from an October high of 9 percent.
The reverse repurchase rate — the rate at which it borrows from commercial banks — was lowered from 6 percent to 5 percent to encourage banks to lend more to consumers.
The Reserve Bank of India also announced measures to ease credit to small businesses, exporters and the real estate sector, all of which have been hit hard by the global economic downturn.
Reserve Bank Governor D. Subbarao said the moves were designed to “arrest the downturn and revive the growth momentum.” They come amid widespread expectations that India will soon unveil billions of dollars in new stimulus measures to help insulate the country from deteriorating economic and financial conditions around the world.
Growth skidded to 7.6 percent last quarter — off from 9.3 percent in the third quarter of 2007_ and exports shrank in October for the first time in seven years.
A major business group welcomed the actions, but said the central bank could have taken additional steps such as lowering the amount of reserves that banks must keep on hand as a way to free up lending.
The measures are “a good start in the correct direction,” the Federation of Indian Chambers of Commerce and Industry said in a statement.
Since mid-September, the Reserve Bank has infused 3 trillion rupees ($60.2 billion) into the financial system.
Falling inflation has allowed the bank to take more aggressive measures to boost growth.
Inflation for the week ended Nov. 22 was 8.4 percent, down from an August high of 12.9 percent, according to revised figures from the Ministry of Commerce.
Subbarao said inflation has been declining faster than expected, despite high food costs, due to falling commodities prices and waning domestic demand.
The government’s decision late Friday to cut fuel costs should further ease consumer prices, he said. Gasoline prices were lowered by 5 rupees a liter to 45.62 rupees, and diesel prices by 2 rupees a liter to 32.86 rupees.
“Economic activity in India will recover sharply, but a period of painful adjustment is inevitable,” Subbarao said.
He added that the economic impact of the Mumbai terror attacks is hard to estimate but he remains hopeful the nation will bounce back quickly.
“The government is geared up now to address the problem and that should inspire confidence,” he said.