India's central bank unexpectedly cut the nation's key lending rate by one percentage point Monday, its latest move to boost liquidity in the face of the global credit crisis. The Reserve Bank of India cut the benchmark repo rate from 9 percent to 8 percent, its first cut since March 2004, according to Goldman Sachs. The bank, which until recently had focused on tightening the money supply to battle double-digit inflation, said the move was necessary to alleviate pressure from the global crisis and maintain domestic financial stability. “The global financial situation continues to be uncertain and unsettled,” the bank said in a statement. “Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets.” “India too is experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in our credit markets in recent weeks,” the bank added. Until recently, Indian regulators were more concerned about controlling inflation and moderating the rapid inflow of foreign funds that helped power a four-year economic boom and stock market rally. The financial crisis changed all that. Now regulators are doing all they can to attract more capital and keep it flowing through the financial system. In recent weeks, the Reserve Bank has slashed the cash reserve ratio - the amount of money banks must keep on hand - from 9 percent to 6.5 percent. The government has also flushed 250 billion rupees ($5.1 billion) to banks under an agricultural debt relief program, eased some restrictions on foreign investment, extended a credit line to domestic mutual funds struggling with redemptions, and raised the rates domestic banks can pay on foreign currency deposits. India's benchmark Sensex index has fallen by more than 50 percent since January, a drop largely driven by the flight of foreign investors, who have pulled out more than $11 billion so far this year. That in turn has pummeled the value of the rupee. Tushar Poddar, vice president for Asia economics research at Goldman Sachs in Mumbai, said in a report Monday that the magnitude and timing of the cut were “well ahead of market expectations.” “The RBI stated concerns about financial stability in the accompanying statement exceeding those on inflation,” he said. “The move is also prompted by a desire to get ahead of expectations, and to restore confidence in the banking system. We think that the aggressive move by the RBI suggests further loosening ahead.”
