India cuts key interest rate in attempt to revive stalled economy

Central bank caught between trying to keep price increases down and boosting investment

PUBLISHED : Wednesday, 20 March, 2013, 12:00am
UPDATED : Wednesday, 20 March, 2013, 4:35am

India's central bank lowered its key interest rate by a quarter of a percentage point yesterday as it tries to revive stalled growth in Asia's third-largest economy.

The announcement was overshadowed by the country's minority government losing a coalition partner.

The Reserve Bank of India, making its second rate cut in three months, said the weakest economic growth in 15 quarters outweighed inflation fears. High prices, especially for food, still remain a concern and could limit the bank's scope to reduce the rate much below its current 7.5 per cent.

"Growth has decelerated significantly, even as inflation remains at a level [that] is not conducive for sustained economic growth," the central bank said in a statement.

The bank's move was eclipsed by the already shaky coalition government losing the support of a key ally. That could add to government instability and delay economic and financial reforms needed to boost growth. The Sensex stock index was down 1 per cent.

Earlier this month, the government estimated that the Indian economy grew 4.5 per cent in the final quarter of 2012, down sharply from growth rates near 10 per cent earlier in the decade.

While wholesale inflation has been hovering near three-year lows in recent months, the retail consumer price index hit a high of 10.9 per cent in February, mostly due to soaring prices for cereals and meat.

The two figures mean the bank is balancing the conflicting goals of keeping price increases under control while lowering interest rates to encourage consumer spending and business investment.

Analysts say that even with the recent cuts, lending rates may still be too high to prompt businesses to borrow.

Businesses applauded Tuesday's cut in the policy repo rate, the interest rate at which commercial banks can borrow from the central bank, but said more action may be needed before banks are encouraged to lower the rates at which they lend to industry.

"We believe this would certainly lend some support to the flagging industrial growth," said Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry, based in Mumbai.

India's economy is expanding at its slowest pace in a decade, with gross domestic product predicted to grow as little 5 per cent in the financial year ending March 31.

That is down from 9 per cent in early 2011, and the slowdown is paired with rising budget and current account deficits that have weakened India's currency.