RBI cuts rates, prods banks to help growth

By Surojit Gupta and John Mair

MUMBAI (Reuters) - The Reserve Bank of India (RBI) cut its key lending rate for the sixth time in 7 months on Tuesday and pushed commercial banks to follow suit to bolster growth which has taken a bigger-than expected hit from the global downturn.

Analysts said the 25 basis point cut -- the smallest since the Reserve Bank of India began slashing rates last October -- signalled it may be nearing the end of its cutting cycle, though most thought rates had not yet bottomed out.

A Reuters survey after the cuts found 10 out of 11 analysts polled expected key short-term rates to be cut again before the end of the year, with a 25 basis points reduction in the next six months the most favoured option.

"We don't see it as the end to easing cycle, but the RBI will switch to more gradual cuts and a wait-and-watch policy," said economist Deepali Bhargava at ING Vysya Bank in Mumbai.

"Sectoral credit numbers... have revealed some pick-up in earlier credit-starved sectors, which is a positive sign."

In its annual policy statement, the central bank said it expected growth to falter sharply for the second year running after expanding at a blistering pace of 9 percent or more in the previous three fiscal years.

Growth was seen slowing to 6 percent in 2009/10, the weakest in seven years, from a downwardly revised estimate of 6.5-6.7 percent for the 2008/09 fiscal year that ended on March 31.

"Any upturn in the growth momentum is unlikely in view of the projected contraction in global demand in 2009/10, particularly the decline in trade," the central bank said.