India should reduce rates further

India needs to cut interest rates further as two reductions in less than a month haven't been enough to make loans affordable for companies and consumers, Bimal Jalan a former central bank governor said.

Policy makers should lower benchmark rates further "if necessary" to enable banks to cut their loan rates, Bimal Jalan, the top official at the Reserve Bank of India from 1997 to 2003, said in an interview in New Delhi.

Measures taken by the central bank and the government in the past month have helped bring the crisis "under relative control."

The global financial crisis has led to a shortage of money in India's banking system, affecting lenders' ability to extend loans to companies and individuals.

That's eroding consumer demand and has prompted production cuts at companies including Ashok Leyland, the nation's second-biggest maker of commercial vehicles, and JSW Steel Ltd.

Demand for domestic loans increased after funds dried up overseas following the seizure in credit markets and the collapse of Lehman Brothers Holdings Inc. on September 15. State Bank of India, the country's largest, cut the rate it charges its best clients to 13 per cent last week from 13.75 per cent, the highest in a decade. ICICI Bank Ltd., the second biggest, hasn't reduced its 17.25 percent charge.

"We need to create conditions so that loans are available at interest rates at pre-crisis levels, as other sources of finances have dried up," said Jalan, 67. "I am in favour of further reducing the cash-reserve ratio and the repurchase rate, if necessary."

Slower growth
India's $1.2 trillion (Dh4.4 trillion) economy may expand at the slowest pace in four years, the central bank estimates, as the credit crisis tips the world's industrialised nations into a recession.

Larsen & Toubro Ltd., the country's biggest engineering firm, said its borrowing costs will climb in the next six months and DLF Ltd., India's largest developer, last week said its hotel venture with Hilton Hotels Corp. may be delayed by up to 18 months as it tries to secure funds.

The benchmark Bombay Stock Exchange Sensitive Index has declined almost 50 per cent this year on concern slowing demand will hurt companies' profits.

India's central bank cut its benchmark repurchase rate by 1.5 percentage points in two stages starting October 20 to 7.5 per cent from a seven-year high of 9 per cent. It also lowered the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as $29.5 billion in cash to ease lending.

"The action taken by the Reserve Bank seems to be absolutely appropriate," Jalan said.