India's central bank cut its key short-term rates by 25 basis points each today to shore up faltering growth as the global economic crisis hits Asia's third-largest economy harder than expected.
Analysts polled by Reuters had been almost evenly split over whether the central bank would lower rates at its policy review or wait to see if a flurry of earlier interest rate cuts was having an effect.
The central bank also cut its economic growth estimate for 2008/09, which ended on March 31, to 6.5 to 6.7 per cent, and forecast growth of around 6 percent for 2009/10.
"Any upturn in the growth momentum is unlikely in view of the projected contraction in global demand during 2009, particularly the decline in trade," the central bank said in its policy statement.
The repo rate, at which the Reserve Bank of India infuses cash into the banking system, will be cut to 4.75 per cent, and the reverse repo rate, at which it absorbs excess cash from banks, will be reduced to 3.25 per cent, effective immediately.
Economists said the cuts showed the central bank recognised the pressure on growth and was ready to act, which should help lift market confidence.
"The RBI has delivered a token 25 bps rate cut essentially signalling to banks to lower their lending rates further," said Sonal Varma, an economist at Nomura.
"Overall, the RBI has maintained its easing bias and further rate cuts will clearly be more measured."
Indian shares pared losses after the central bank move and the rupee firmed, while federal bond yields eased to their lowest in more than two months.
The Reserve Bank also repeated a call for banks to pass on its rate cuts to customers and said deposit rates should also fall.
Reuters