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India cbank slashes repo rate

Mumbai, October 20, 2008

India's central bank unexpectedly slashed its key lending rate for the first time in more than four years on Monday, in a fresh attempt to shield the economy from the global financial crisis.

Shares and the rupee jumped and bond yields fell after the Reserve Bank of India (RBI) said it had cut its repo rate by 100 basis points to 8.0 percent with immediate effect, just four days ahead of a scheduled policy review.

The move come about two weeks after central banks around the world, including the US Federal Reserve and European Central Bank, cut interest rates in unison to try to restore confidence in the world's shattered financial markets.

The rate cut also follows similar action by other Asian countries, including China, Hong Kong, Taiwan and South Korea, following the financial storm unleashed by the collapse of Lehman Brothers.

India's policy makers have taken a slew of measures in recent weeks as foreign capital was pulled out of the stock market and as credit markets seized up as onshore liquidity evaporated in part because banks were wary of lending.

"Funding constraints, capital outflow and recessionary global conditions are likely to put pressure on the growth momentum and the central bank thus is looking to counter that drag," said Gaurav Kapur, senior economist at ABN AMRO Bank.

Finance Minister Palaniappan Chidambaram welcomed the rate cut, saying it would be beneficial for borrowers and investors.

"The cut in repo rate is consistent with our objective to moderate inflation as well as ensuring satisfactory growth."    

The 13-year federal bond yield fell 25 basis points to 7.75 percent. The benchmark 10-year bond was not traded due to interest payments.

The stock market, which on Friday fell to its lowest close since June 2006, jumped as much as 5.6 percent but then pared gains to close up 2.5 percent.

The partially convertible rupee, which slumped to a record low against the dollar earlier in October, was unchanged at 48.88/89 per dollar.

The central bank said calm had yet to be fully restored to financial markets despite aggressive action by countries directly affected by the crisis.

"Due to financial integration, this uncertainty is transmitting also to countries outside the epicentre of the crisis," it said in a statement.

India has been particularly vulnerable to rising risk aversion among foreign investors. They have pulled $11.8 billion from the stock market this year, halving stock values, marking a sharp turn around for the benchmark index which had risen 47 percent in 2007.

That in turn hit the rupee. A loss of capital inflows from foreign portfolio investment could add to pressure on the balance of payments because the current account deficit is already running at nearly 2 percent of gross domestic product.

Even though the economy is driven mostly by domestic demand, it is showing signs of slowdown from 9 percent growth last year with industrial output growing at just 1.3 percent annually in August, its slowest pace in a decade. -Reuters




Tags: India | repo rate |

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