India's central bank lowered its key interest rate by a quarter percentage point Tuesday as it tries to revive stalled growth in Asia's third-largest economy. The announcement was overshadowed by India's minority government losing a coalition partner.
In making its second rate cut in three months, the Reserve Bank of India cited the weakest economic growth in 15 quarters as outweighing 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 percent.
"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 percent.
The government earlier this month estimated the economy grew 4.5 percent in the October-December quarter, down sharply from growth rates near 10 percent 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 percent in February, mostly due to soaring prices for cereals and meat.
The two figures mean the bank is balancing 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. The central bank also on Tuesday left the cash reserve ratio for banks untouched Tuesday, after lowering it by a quarter point to 4 percent in January. A lower cash reserve ratio frees up more money for commercial banks to lend.
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.
However, she said that commercial banks are unlikely to cut their own rates in a hurry, mostly because deposit growth of about 12.5 percent still lagged behind credit growth of 15-17 percent.
"The key for industry is for lending rates by banks to come down, but this would happen only when banks are comfortable with deposits," Kidwai said.
India's economy is expanding at its slowest pace in a decade, with gross domestic product predicted to grow as little 5 percent in the fiscal year ending March 31. That's down from 9 percent in early 2011, and it's paired with rising budget and current account deficits that have weakened India's currency.
The government estimates the country needs at least 8 percent growth to create enough new jobs for the 13 million Indians entering the workforce each year.
The finance minister last month unveiled a new budget aimed at trimming the budget deficit and attracting foreign investment.