India cuts rates, offers stimulus to industry in wake of terror attacks

By Cherian Thomas  |   2008-12-8  |     NEWSPAPER EDITION

INDIA'S central bank cut interest rates for the third time in less than two months after the terror attacks shook investor confidence in an economy already weakened by a global recession.

The Reserve Bank of India reduced its repurchase rate to 6.5 percent from 7.5 percent, Governor Duvvuri Subbarao said at the weekend. 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, according to Bloomberg News.

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 November 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.

"The downside risks to growth have increased after the terror attacks," said N.R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. "We expect the central bank to loosen monetary policy further."

The government will also announce a fiscal stimulus package to support industries, Commerce Minister Kamal Nath said. India is expected to unveil a 750-billion-rupee (US$15-billion) plan to boost growth, the Economic Times reported on Thursday.

Lower interest rates will allow Indian companies to turn to local banks for funding rather than rely on lenders in the United States and Europe.

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.

Bonds gained for a fourth week at the end of trading on Friday, pushing yields to 6.76 percent on speculation slowing inflation will prompt the central bank to reduce borrowing costs.