India Cuts Interest Rates

India’s central bank cut interest rates for the third time in less than two months after last week’s terror attacks shook investor confidence in an economy already weakened by a global recession., 12/8/2008 5:20:42 AM

The Reserve Bank of India reduced its repurchase rate to 6.5 percent from 7.5 percent, Governor Duvvuri Subbarao told reporters in Mumbai. The bank also cut the reverse repurchase rate at which it borrows overnight to 5 percent from 6 percent. The cut in the reverse repurchase rate was the first since 2003.

Companies including Merck KGaA, Daiichi Sankyo Co., GlaxoSmithKline Plc and Sanofi-Aventis SA have halted business trips to India after terrorists attacked luxury hotels in the financial capital of Mumbai on Nov. 26 and killed 163 people. The tragedy came as India’s economy faces its weakest economic expansion in six years, dragged down by the global recession.

Lower interest rates will allow Indian companies to turn to local banks for funding rather than rely on lenders in the U.S. and Europe, where a credit crunch has dried up money. Forty percent of Indian industry’s funding in the year ended March 31 came from borrowings from abroad and the sale of new shares in the stock market, according to Tehmina Khan, international economist at Capital Economics Ltd. in London.

Today’s move by Subbarao was made easier after the government reduced fuel prices yesterday by as much as 10 percent, which may further drive down inflation from the current seven- month low of 8.40 percent.

India’s economic expansion is slowing due to a decline in exports and investments from abroad, as well as interest-rate increases earlier this year to control inflation that accelerated to a 16-year high in August.

The government wants lower borrowing costs to push growth back up to around 9 percent, a pace it says needs to be sustained to reduce poverty. The World Bank estimates 76 percent of India’s 1.2 billion people live on less than $2 a day.

India’s consumers, who account for 60 percent of the economy, are also spending less in response to a declining stock market. The benchmark Sensitive Index has dropped 56 percent this year as overseas investors sold a record $13.5 billion of equities. Foreign lenders are shying from emerging markets like India as the U.S., Japan and Europe succumb to recession.

Industrial production, which makes up a quarter of India’s $1.2 trillion economy, may drop in October for the first time in at least 14 years. Motor vehicle sales sank 14 percent in October. The industrial output data will be announced on Dec. 12.

India Cuts Interest Rates