MUMBAI - INDIA'S central bank on Saturday slashed its two key short-term interest rates by a full percentage point each to stimulate an economy hit by the global recession and shaken further by the Mumbai attacks.
The Reserve Bank of India reduced its repo rate - the rate at which it lends to commercial banks - to 6.5 per cent and its reverse repo rate -- the rate at which it borrows overnight - to 5.0 per cent.
Indian banks' unlikely to drop rates despite cbank
MUMBAI - INDIAN banks are unlikely to sharply drop lending rates immediately despite the central bank slashing short-term rates as their cost of funds is still high and loan demand remains robust.
Deposit rates moved up over the last few months as banks' wooed customers to battle tight liquidity that bumped up overnight cash rates to more than 20 per cent in October.
'The measures are to arrest the downturn in the economy and revive growth,' said the bank's governor, Duvvuri Subbarao.
'Business confidence has been affected and corporate credit dented,' he told a news conference.
The rate cuts - the third by the bank in less than two months - were seen as part of a wider stimulus package expected to galvanize India's trillion-dollar economy which has been slowing significantly.
'We still see uncertain global conditions which will impact us domestically,' said Mr Rakesh Mohan, a bank deputy governor.
Government officials said the stimulus package could come in the next few days. Reports say the relief package - aimed at helping sectors hit by a slump in domestic demand such as the auto industry - could total US$15 billion (S$22.8 billion).
India's economy has been hit by the global recession and confidence has been undermined further by last week's deadly attacks in the financial capital Mumbai that killed 163 people including more than two dozen foreigners.
'Our measures to lower rates should send a direct and decisive signal to banks to lower their lending rates,' Mr Subbarao said, referring to the lending paralysis that has gripped India in the wake of the global credit crunch.
Several banks said after the announcement they would soon cut both lending and deposit rates.
'These measures will advance growth for India,' said Mr Rupa Rege Nitsure, an economist at the state-run Bank of Baroda.
Central bank authorities are hoping the rate reductions will stimulate investment and consumer demand, which have slowed sharply as the global downturn has weakened the domestic economy.
The government's decision to cut fuel prices on Friday, a move that was expected to ease inflationary pressures, made it easier for the central bank to make deep interest rate cuts, economists said.
The central bank also pumped in more money into the Small Industries Development Bank of India to promote funding for small industries and aimed to give the National Housing Bank funds for the ailing realty sector.
The fresh steps 'together with earlier measures would step up demand and arrest the growth moderation,' the bank governor said.
He said over three trillion rupees (S$92.1 million) had been pumped into the Indian financial system so far by the easing measures.
Prime Minister Manmohan Singh, a respected economist who opened up India to foreign investors as finance minister in the 1990s, has reclaimed the portfolio after moving Palaniappan Chidambaram to the home ministry to bolster security.
Mr Singh this week forecast growth of 7.5 per cent for the year to March 2009.
But economists say it could be as low as 6.8 per cent this year and 5.5 per cent the following year.
'Companies across sectors have begun announcing plant shutdowns and delays in project implementation,' banking group Citi said in a report forecasting 6.8 per cent growth this year.
'The negative factors appear to more than offset the possible lagged impact of aggressive monetary easing and lower commodity prices,' it said.
Analysts also say the government needs to clearly show it is taking steps to bolster security and protect the country from further militant attacks to boost business confidence and reassure the international financial community. -- AFP
