India has joined China, Australia, the UK, Europe and other major economies in stepping up the pace of interest rate cuts to try and ease the pain of the economic slowdown.
But like China and Australia, India’s economic growth remains positive, but is slowing.
More worrying is, like two other major emerging economies in Brazil and Russia, the impact of the credit crunch and freeze which seems to be doing more damage than the recession in the major developed countries.
In contrast China is being hit by the slump in the US, Europe and Japan (as is Japan), as well as a domestic property crunch that is hurting.
India’s huge back office outsourcing sector is feeling the pinch with all major operators reporting falling growth and revenues.
Adding to the pressures in India are the ramifications in financial markets from the terror attack in Mumbai.
The combination was enough to force the central bank into its third rate cut in three months and several other important moves to maintain liquidity in the system (Source).
The bank cut the repo rate by 1%, pushing the key short-term interest rate to 6.5%, the lowest level in two-and-a-half years, and it cut the reverse repo rate, used to absorb cash from the market, by 1% point to 5%.
The central bank also revealed plans to pump more funds into the small and medium business sector, and will reveal plans to boost lending to the national housing system next week.
The cumulative amount of primary liquidity made available by the central bank to the country’s financial system since mid-September this year is worth more than Rs3,000bn ($US 60 billion).
Since the collapse of Lehman Brothers in mid-September, the bank has cut the repo rate by 2.50%, in a series of moves aimed at keeping Asia’s third-largest economy growing.
Australia’s RBA has cut rates here by 3% since the start of September.
“The reduction in repo and reverse repo rate should result in a reduction in marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms,” said Duvvuri Subbarao, India’s central bank governor.
“The aim of these measures was to augment domestic and forex liquidity and to enable banks to continue to lend for productive purpose while maintaining credit quality so as to sustain the growth momentum."
The bank said in the statement on its website:
"The outlook for India going forward is mixed. There is evidence of economic activity slowing down.
"Real GDP growth has moderated in the first half of 2008/09. Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating.
"The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub-sectors.
"For the first time in seven years, exports have declined in absolute terms in October.
"Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence.
"On the positive side, headline inflation, as measured by the wholesale price index, has fallen sharply, and the decline has been sustained for the past four weeks, pointing to a faster than expected reduction in inflation.
"Clearly, falling commodity prices have been the key drivers behind the disinflation; however, some contribution has also come from slowing domestic demand.
The reduction in prices of petrol and diesel announced last night should further ease inflationary pressures."
Among other measures the central bank governor also confirmed an early statement that the bank would now allow companies to buy back their foreign currency convertible bonds.
The bank revealed in November, when it announced its last liquidity boost and rate cut, that it was looking at doing this to help companies to unwind the bonds in an orderly fashion, most of which fall due in the next few years.
The Central Bank Governor, Mr Subbarao said that economic growth was likely to slowdown for the year ending in March 2009 more than had previously been expected, which is between 7.5% and 8%
“The outlook for India going forward is mixed … There is evidence of economic activity slowing down,” said Mr Subbarao. “Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating. The services sector too, which has been our prime growth engine for the last five years, is slowing.”
On Sunday the Indian government revealed an extra $US4 billion of spending to help keep the economy ticking over.
The national government said there would also be a big rise in expenditure in next year’s budget, without being specific.
The new measures follow the rate cut by the Reserve Bank. Confidence has been undermined further by attacks in the financial capital Mumbai that killed 163 people, including more than two dozen foreigners.
"The government has decided to seek authorisation for additional planned expenditure of up to 200 billion rupees (four billion US dollars) in the current (financial) year," Prime Minister Manmohan Singh’s office said in a statement.
"The government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity."
Under the package, the government said that various categories of value-added tax would be cut by four percent to in
