After big cuts, India has room to axe rates further

By Saikat Chatterjee

MUMBAI (Reuters) - India could cut interest rates by another 150 basis points by mid-2009 as authorities fight to prop up sagging growth, but the Reserve Bank is unlikely to seek zero rates like the United States and Japan even as deflation rears its head.

The Reserve Bank of India cut interest rates on Friday for the fourth time since the global financial crisis blew up in September, taking the total reduction in its key lending rate or the repo rate to 350 points. It now stands at 5.50 percent.

Other central banks have slashed rates heavily too to fight off the deepest global financial crisis in decades. The U.S. Federal Reserve and Japan have cut their rates close to zero, sparking debate on how far central banks will have to go to revive their economies.

In India, Ila Patnaik, senior fellow at the National Institute of Public Finance and Policy, a think tank, advocates that the Reserve Bank of India (RBI) follows the Federal Reserve and the Bank of Japan.

Other analysts are much more cautious, suggesting more modest cuts. Macquarie Research has pencilled in cuts of 100-200 basis points, HSBC 50 basis points and JPMorgan 150 basis points.

Limited government spending power puts the emphasis on the central bank to boost the economy but with growth this year still likely to be the envy of any developed nation, such aggressive cuts aren't warranted, they say.

Indeed, cutting too sharply could backfire by sparking a fresh spurt of demand-led inflation or causing a U.S.-like rise in indebtedness.

Patnaik estimated that wholesale prices, the main measure in India, took a sharp fall in the final quarter of 2008, making Reserve Bank rates way too high.