MUMBAI, Jan 2: India slashed its main interest rates by one percentage point on Friday, its fourth cut in four months, and tried to draw more funds into the country to boost growth as it warned of a tough year ahead.

While the Reserve Bank of India (RBI) cut its key lending rate to an 8-1/2-year low of 5.5 per cent, the government opened the corporate bond market to more foreign investment, eased overseas borrowing rules and promised more capital to state-run banks.The coordinated action, which had been well flagged by the government, follows cuts last month in Japan and the United States whose rates are close to zero, and in neighbouring China, as a deep slowdown grips economies the world over.

Economists said India’s two-pronged approach, the second such move in a month, took into account a collapse in domestic and external demand, rapidly slowing inflation, faltering business confidence and banks’ continued reticence to lend.“It will give a breathing space to the whole productive sector, especially construction and infrastructure sectors,” said N R Bhanumurthy, economist at the Institute of Economic Growth.

“Whether it can help to revive GDP growth will depend on how soon banks reduce interest rates and raise lending to the productive sectors.”

The 10-year bond yield fell to 5.07 per cent, its lowest in more than five years, from the previous day’s close of 5.29 per cent, and the rupee climbed 0.4 per cent on the day.

India’s $1 trillion economy has expanded at an average of nine per cent or more for the past three years, but many see it slowing to seven percent this fiscal year to March and six per cent next year.

The central bank, which acted ahead of a scheduled policy review on Jan 27, said the fundamentals of the economy were strong but there was evidence of activity slowing, and in some sectors contracting, as recession gripped major economies.

A key manufacturing index contracted again in December and companies cut jobs to reduce costs. “Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply,” the central bank said.

“But a period of painful adjustment is inevitable.” It also lowered its reverse repo rate, the rate at which it mops up surplus cash from banks, by 100 basis points to four per cent. Both reductions are effective immediately.—Reuters