India Cuts Rates, Unveils Package to Spur Economy (Update1)
By Kartik Goyal and Anil Varma
Jan. 2 (Bloomberg) -- India cut interest rates for the fourth time since October and unveiled another stimulus package to counter the effect of the global recession on Asia's third- largest economy.
The Reserve Bank of India lowered the repurchase rate by one percentage point to 5.5 percent and the reverse-repurchase rate by the same margin to 4 percent, it said in a statement in Mumbai. The government also more than doubled the amount overseas investors can hold in local bonds and extended capital to the nation's banks.
Governments worldwide are cutting interest rates and announcing spending packages to boost growth amid a deepening global slump. Prime Minister Manmohan Singh, seeking re-election in May, is aiming to boost consumption as a decline in exports forces companies to reduce production and fire workers.
``There's still scope for rate cuts as the economic picture is quite bleak,'' said K. Ramanathan, who manages the equivalent of $2.2 billion in Indian debt at ING Investment Management in Mumbai. ``The policy response to the unfolding economic slowdown is quite satisfying.''
India's benchmark stock index rose for a second day to a two-week high, in anticipation the government would announce measures to stimulate the economy. The yield on the 10-year benchmark bond fell to the lowest since April 2004. Today's measures were announced after the stock market closed.
``Both bonds and equities rallied in anticipation of these measures,'' said Kenneth Andrade, head of investments at IDFC Asset Management Co. and overseeing assets worth $1.8 billion. ``We now need to see if these measures will bring back demand and stimulate growth.''
Stimulus Package
China in November unveiled a 4 trillion-yuan ($586 billion) stimulus package to revive demand. Thailand Dec. 26 said it will spend 300 billion baht ($8.6 billion) to help an economy the government predicts may slip into a recession in the first quarter of this year.
India has become increasingly vulnerable to slowdowns and financial crises in other countries.
Trade represented 35 percent of GDP for the year ended March 31, up from 21 percent in 1997-98, the year of the Asian financial crisis, according to the central bank.
Exporters have cut about 65,500 jobs as recessions in the U.S. and Europe, the nation's biggest markets, damped overseas demand. Industrial production fell 0.4 percent in October, the first decline in 15 years, and exports plunged 9.9 percent in November after falling for the first time in seven years the previous month.
Develop Market
To help develop India's corporate bond markets, giving companies better access to funds, the government today raised the overseas investment limit to $15 billion from $6 billion, according to a statement e-mailed from New Delhi.
State governments will be allowed to raise an additional 300 billion rupees in the year to March 31 to build roads, schools and hospitals.
The government will give 200 billion rupees to boost the capital of state-run banks and provide 250 billion rupees for non-bank finance companies.
Today's measures follow a 200 billion rupee spending plan for roads and ports and cuts in excise duty unveiled last month.
The monetary authority has slashed its overnight lending rate, the repurchase rate, by 3.5 percentage points and its borrowing rate, the reverse repurchase rate, by 2 percentage points since Oct. 20. It cut the proportion of deposits banks must hold in reserve by 4 percentage points to the lowest since 2006.
``The measures announced so far are adequate enough to achieve 7 percent growth'' in the year ending March, Montek Singh Ahluwalia, deputy head of India's Planning Commission told reporters in New Delhi. ``The key is if the ministries can implement and spend what they have been allocated, it would be more than enough to stimulate growth.''
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