India Lowers Key Rate


India's central bank unexpectedly lowered its key repurchase rate for the first time since 2004 as the global credit-market turmoil threatens to plunge the world economy into recession.

The Reserve Bank of India cut its overnight lending rate to 8 percent from 9 percent, according to a statement in Mumbai today. The action came after the bank reduced the cash reserve ratio by 2.5 percentage points to 6.5 percent effective Oct. 11.

The move signaled Governor Duvvuri Subbarao sees weaker growth as a bigger threat than inflation in Asia's third-largest economy. China's economic growth slumped to a five-year low last quarter and Vietnam reduced borrowing costs today, as JPMorgan Chase & Co. and UBS AG said the world economy is sliding into its first recession since 2001.

Subbarao, who took office last month and is scheduled to release his first quarterly monetary policy statement on Oct. 24, can afford to reverse four years of tighter credit as declining commodities prices ease pressure on inflation.

India's key wholesale price inflation slowed more than economists expected to 11.44 percent in the week to Oct. 4, a four-month low. Crude oil prices have halved since their peak in July. The Reuters/Jefferies CRB Index of 19 commodities dropped to the lowest in four years on Oct. 17.

Finance Minister Palaniappan Chidambaram today sought parliament's approval to spend an extra 2.4 trillion rupees ($49 billion) on rural jobs, food and oil subsidies in the year ending March 31 to boost the economy, which grew at a record 8.8 percent pace since 2004.

The International Monetary Fund said growth in India's economy may slow to 7.9 percent in 2008 and slide further to 6.9 percent in 2009. The IMF estimates India's economy grew 9.3 percent in 2007.

The collapse of banks in the U.S. and Europe prompted the IMF this month to also scale back its forecast for world growth in 2009 to 3 percent, a level the fund itself has called the dividing line between a global recession and expansion, from 3.9 percent this year.


TradingEconomics.com, Bloomberg
10/20/2008 5:17:00 AM