India slashed its benchmark interest rate by agreater-than-forecast half a percentage point, seeking to bolstergrowth with the first reduction since 2009. Inflation might limitthe room for further cuts, the central bank said.

Governor Duvvuri Subbarao lowered the repurchase rate to 8percent from 8.5 percent, the Reserve Bank of India said in astatement in Mumbai today. The outcome was predicted by three of 25economists in a Bloomberg News survey. Seventeen expected a 0.25percentage-point cut and the rest predicted no change.

The move stoked gains in the rupee and government bonds, and maybuttress demand in an economy hampered by political gridlock that'srestraining investment. Policy makers are seeking at the same timeto contain inflation that remains the fastest among the BRICnations.

“They are playing with fire,” said Jahangir Aziz, an economistat JPMorgan Chase & Co. in Washington who used to work at theInternational Monetary Fund. “I am increasingly assured that thisis going to be last rate cut” given the risks to inflation from oilprices and loose fiscal policy, he said.

The yield on the most-traded 8.79 percent notes due November2021 fell to 8.34 percent as of 4:28 p.m. in Mumbai, from the day'shigh of 8.51 percent and yesterday's close of 8.46 percent,according to the Reserve Bank of India's trading system. The rupeestrengthened 0.2 percent to 51.56 per dollar, according to datacompiled by Bloomberg. It slumped 16 percent last year, spurringprice pressures by boosting import costs. The BSE India SensitiveIndex of stocks closed up 1.2 percent.

“The reduction in the repo rate is based on an assessment ofgrowth having slowed below its post-crisis trend rate which, inturn, is contributing to a moderation in core inflation,” theReserve Bank said. “However, it must be emphasized that thedeviation of growth from its trend is modest. At the same time,upside risks to inflation persist. These considerations inherentlylimit the space for further reduction in policy rates.”

Gross domestic product may expand 7.3 percent in the yearthrough March 2013, compared with the baseline projection of 7percent for the previous 12 months, the central bank estimatedtoday. Inflation will probably be at 6.5 percent by the end of thecurrent financial year, it said.

Uncertainty about global commodity prices, particularly crudeoil, India's fiscal shortfall, a “very high” current-accountdeficit and food inflation are among risks to the outlook, theReserve Bank said.

'Price Stability'

“We will do everything possible to maintain price stability,”Finance Minister Pranab Mukherjee said in New Delhi today. “Themonetary policy announcement should help in investment revival andstrengthen business sentiment. We will take some further additionalsteps in the coming weeks to reinforce growth focus.”

Expansion has been hurt by declining investment and moderatingconsumer spending after the Reserve Bank raised rates by a record3.75 percentage points from March 2010 to October last year tofight inflation.

India's monetary easing today contrasts with such Asianneighbors as Thailand and Indonesia, which have halted rate cuts asinflationary pressures gain. Bank of Korea Governor Kim Choong Soothis week urged major central banks to plan an orderly withdrawalof excess liquidity and said further easing may hurt emergingeconomies and the global economic recovery.

China's growth slowdown may limit the region's economicrecovery. Singapore's exports unexpectedly dropped in March asshipments of electronics eased and petrochemical sales fell amid adecline in demand from China, a report today showed. Non-oildomestic exports fell 4.3 percent from a year earlier, after arevised 30.4 percent increase in February.

Foreign direct investment in China dropped for a fifth straightmonth in March as economic growth slowed, with inbound investmentfalling 6.1 percent from a year earlier to $11.76 billion, a reportby the Ministry of Commerce showed today.

In Australia, the central bank said a weaker expansion flowingthrough to slower inflation would increase prospects for the firstinterest-rate cut this year, minutes of its April 3 meeting showed.The minutes reaffirmed that the next rate reduction hinges on anApril 24 report on first-quarter inflation, as recent dataindicates the economy is growing slower than the central bankpredicted.

The Reserve Bank of Australia decided against lowering borrowingcosts at its three meetings this year as the global recoverystabilizes and a mining boom sustains domestic growth.

U.K. inflation accelerated to 3.5 percent in March, whileEuro-area inflation was 2.7 percent, reports showed today.

U.S. Industrial Output

In the U.S., industrial production may have risen 0.3 percent inMarch from the previous month, according to the median forecast ina Bloomberg News survey ahead of a report today. Home startsincreased to a 705,000 annual rate in March following a 698,000pace the prior month, according to a Bloomberg survey median.

India's Subbarao has already eased monetary conditions byreducing the amount of deposits lenders must set aside as reservestwice this year, by a combined 125 basis points, to 4.75 percent toease cash shortages in the banking system. He left the cash reserveratio unchanged today. Liquidity is “steadily moving towards” itscomfort zone, the RBI said.

Recent patterns of inflation and expansion signal India's trendrate of economic growth has declined from its peak before thefinancial crisis, the Reserve Bank said. Significant supplybottlenecks in infrastructure, energy, minerals and labor are amongthe main reasons why, it said.

The 6.89 percent climb in March in India's benchmarkwholesale-price index exceeded the median 6.65 percent estimate ina Bloomberg News survey of 33 economists, data showed yesterday.While Indian inflation has eased from more than 9 percent recordedin most of 2011, it remains the fastest in the so-called BRIC groupof largest emerging economies that also includes Brazil, Russia andChina.

Monetary policy will continue to aim to “condition and containperception of inflation” in the range of 4 percent to 4.5 percent,the Reserve Bank said. The central bank's immediate comfort zone isinflation at 5 percent and that level is achievable, Subbarao saidat a briefing in Mumbai today.

“The RBI is faced with a very difficult situation as growth isslowing and inflation remains high,” said Rupa Rege Nitsure, aneconomist at state-owned Bank of Baroda in Mumbai. India needs“efforts from the government's side to boost the capacity of theeconomy by accelerating reforms,” Nitsure said.

Higher raw material costs and the rupee's decline are leadingcompanies including steelmakers to raise prices. Steel Authority ofIndia Ltd., the nation's second-largest producer, increased tariffsin April for the fourth time in three months.

Current-Account Deficit

Prime Minister Manmohan Singh's government, grappling withfiscal and trade gaps and depressed industrial output, faces one ofthe most challenging periods since taking office in 2004.

In the budget on March 16, the administration announced recordborrowing needs to plug a fiscal shortfall estimated at 5.1 percentof gross domestic product in 2012-2013. The current-account deficitreached $19.6 billion in the three months through December, theworst quarterly performance on record.

“From the perspective of vulnerabilities emerging from thefiscal and current account deficits, it is imperative formacroeconomic stability that administered prices of petroleumproducts are increased to reflect their true cost of production,”the Reserve Bank said.

A current-account gap at 4.3 percent of gross domestic productin the fourth quarter of 2011 is unsustainable, it said.

Policy reversals have further hindered Singh's economic agenda,including the suspension of plans in December to open India'sretail industry to foreign companies.

Bloomberg News

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