Central bank of India suddenly slashes rates

For the first time in more than four years India joins the global attempt to shield its economy from the global financial crisis.

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MUMBAI // India's central bank unexpectedly cut its key lending rate today for the first time in more than four years, 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 per cent with immediate effect, just four days ahead of a scheduled policy review.

The move comes 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. Asian countries, including China, Hong Kong, Taiwan and South Korea, did the same. India's policymakers 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," he said.

The 13-year federal bond yield fell 25 basis points to 7.75 per cent. The benchmark 10-year bond was not traded due to interest payments. The stock market, which fell to its lowest close since June 2006 on Friday, jumped as much as 5.6 per cent but then pared gains to close up 2.5 per cent. The partially convertible rupee, which slumped to a record low against the dollar earlier in October, was unchanged at 48.88/89 per dollar.

* Reuters