MUMBAI (Reuters) - The Reserve Bank of India (RBI) cut its short-term lending and borrowing rates by 50 basis points each on Wednesday, saying the country's growth had been hit more than expected by the global financial crisis and downturn.
Analysts said the central bank's evening move would give the stock market a boost and see bond yields fall at the open of trade on Thursday, but it would offer little support to the rupee, which has fallen to record lows this week.
The RBI said it was lowering the repo rate, at which it lends to banks, to 5.0 percent from 5.5 percent. The reverse repo rate at which excess cash is absorbed from the banking system was cut to 3.5 percent from 4.0 percent.
Both rates are at their lowest since they were introduced in 2000, following a series of aggressive cuts since October as authorities try to shore up activity.
"Markets were looking forward to this and there should be a mild upward reaction for a day or two, but then investors will start worrying about the next trigger," said Deepak Jasani, head of retail research at HDFC Securities.
The Reserve Bank said while Indian financial markets were orderly, the country's growth prospects had taken a hit from the global financial crisis and subsequent economic downturn.
"This impact has turned out to be deeper and wider than anticipated earlier," the central bank said in a statement.
Policymakers expect India's economy to grow at a six-year low of 7.1 percent in the 2008/09 fiscal year that ends on March 31, after growing at or above 9 percent in the previous three years. Analysts expect the economy to slow further in 2009/10.
On Friday, data showed growth in the December quarter slowed to an annual 5.3 percent, its slowest in nearly six years.
Exports fell for a fourth consecutive month in January and factory output fell by 2 percent in December from a year earlier.
"I think interest rates have still not bottomed out and there is further scope for about 100 basis points cut in repo and reverse-repo rate," said N.R. Bhanumurthy, an economist at the Institute of Economic Growth.
BANK LENDING
The central bank said the reduction in rates should further encourage banks to provide credit for productive purposes at viable interest rates. At a policy review in late January, it held rates steady, saying banks were yet to pass on earlier cuts.
"This is another clear signal to banks to reduce their lending rates further, but by when, it is difficult to say," Nomura economist Sonal Varma said.
Wednesday's cuts take the cumulative reduction in the repo rate to 400 basis points in five moves since mid-October. The reverse-repo rate has been cut by 250 basis points in three moves since early December.
"This may be the last rate cut for some time now, and the central bank will wait for incoming data and until the new government assumes office," said A. Prasanna, economist at ICICI Securities in Mumbai.
National elections are being held in stages over April and May.
Analysts said the benchmark stock index could rise by 1-2 percent on Thursday morning, with banks, realty and auto firms among those expected to gain. The index rose 0.2 percent on Wednesday, one day after posting its lowest close in more than three years.
The rate cuts should also see bond yields fall sharply, with the market also likely to be supported by the central bank's plans to buy back up to 90 billion rupees ($1.75 billion) of bonds on Thursday.
As well as rate cuts, the central bank has cut banks' reserve requirements and made extra funds available to keep markets fluid and credit flowing since the collapse of Lehman Brothers last September.
The central bank said it would continue to ensure ample funds, saying it had made extra liquidity of 3.9 trillion rupees available to the banking system.
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