Global slowdown taking toll, India cbank takes steps

MUMBAI (Reuters) - The global slowdown is having a bigger than expected impact on India's economy, the central bank said on Saturday as it took the latest in a series of steps to improve money market liquidity and help exporters.

As world leaders met in Washington to address the worst financial crisis in 80 years, the Reserve Bank of India (RBI) said more domestic steps, including export credit measures, were imperative to sustain growth momentum.

The central bank has already reduced its key lending rate, slashed banks' cash reserve requirements and cut their bond reserve requirements in the past month to release funds into a banking system strained by the global financial crisis.

"There are indications that the global slowdown is deepening with a larger than originally expected impact on the domestic economy, particularly for the demand conditions in the medium and small industry sector and export-oriented sectors," it said in a statement on its web site www.rbi.org.in.

"Particular attention needs to be paid to maintaining the viability of sectors that contribute significantly to employment and exports."

The global credit crisis paralyzed India's money markets last month, prompting the bank to cut its main lending rate by 150 basis points to 7.5 percent and pump in cash. But firms' interest costs have risen as they also battle slowing demand and shrinking export markets.

Factory output growth has fallen, manufacturers have put expansion plans on hold, and government receipts from factory gate taxes contracted in October.

"There is definitely a liquidity problem which persists even now and needs to be addressed," Saugata Bhattacharya, an economist with Axis Bank, said.

"The export sector of the economy is extremely vulnerable as supply of funds is squeezed," Bhattacharya said.

THE MEASURES

India's $1 trillion economy grew at an annual rate of 9 percent or above in the past three fiscal years, second only to China among major economies.

The central bank forecast last month it would grow 7.5 to 8.0 percent this fiscal year, which ends in March, but economists say growth is more likely to be about 7 percent.

On Saturday, it repeated a promise to act again if needed.

"The Reserve Bank will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate," it said.

As for measures on Saturday, it announced:

- a special repurchase facility announced last month to provide liquidity for mutual funds and non-banking finance companies would continue until March 2009.

- it was raising the limit on export credit refinance available to banks, to release extra liquidity of about 220 billion rupees ($4.5 billion) into the banking system.

- housing finance companies would be allowed to raise funds through short-term overseas borrowings.

- it would consider proposals from local firms to buy back foreign currency convertible bonds early.

- it had reduced provisioning on standard assets of banks to a uniform level of 0.4 percent, after earlier raising requirements on certain home loans, retail and property lending.

- loans for farming, small and medium enterprises to continue to attract provisioning of 0.25 percent.

- it lowered risk weights for banks on some other exposures, including commercial real estate and unrated claims on corporates.

The central bank said the repayment period for the first tranche of pre-shipment export credit for exporters was extended to 270 days from 180 days with immediate effect.

It was also raising the interest rate ceiling on deposits of non-resident Indians with local banks by 75 basis points.

Economists said this was to attract fresh foreign money into the banking system and prop up the struggling rupee, which hit a record low of 50.29 per dollar in late October.

"With interest rates moving toward zero percent globally, it will provide a positive arbitrage in India to attract NRI (non resident) deposits," Indranil Pan, chief economist with Kotak Mahindra Bank, said.

(Additional reporting by V. Ramakrishnan; Editing by Charlotte Cooper)