India cuts rates by 50 basis points to spur growth

India's central bank cut its main interest rates by 50 basis points on Tuesday - its first reduction in three years - but said there was limited scope for further easing.

The Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would fall to 8.0 percent and the reverse repo rate, which it pays banks for deposits, would fall to 7.0 percent.

"We expect a 25-basis point cut," said Siddhartha Sanyal, chief India economist at Barclays Capital had said earlier.

"The central bank will rebalance its priorities somewhat to boost growth, while not completely letting go of its anti-inflationary stance," he said.

The central bank's policymakers were due to announce their decision at around 0530 GMT.

Emerging market nations have been cutting rates to bolster expansion and shield their economies from Europe's sovereign debt crisis as well as the weakened US economy and to offset a slowdown in China.

But Asia's third-largest economy has kept rates at their highest level since 2008 to tame inflation, which has caused huge hardship to India's hundreds of millions of poor and is a political tripwire in the nation of 1.2 billion people.

The rate rises have subdued inflation that was near double-digits for most of last year and now policymakers' attention is focused on the slowing economy.

India's industrial output grew in February by a lower-than-expected 4.1 percent after expanding by just 1.1 percent in January, data last week showed.

The central bank hiked interest rates 13 times from March 2010, undertaking the most aggressive monetary policy tightening drive of all major economies, and it has kept rates on hold since late last year.

In a preliminary step to loosen monetary policy, the bank has twice reduced since the start of 2012 the amount of cash commercial banks must keep in reserve to a bid to boost lending and spur growth.

The government expects growth to improve in the new fiscal year which started April 1, targeted at 7.6 percent, but this is still far below the eight-to nine-percent growth for much of the past decade.

India's slowing growth comes as the Congress party-led government, battered by a string of graft scandals, has been under heavy financial market pressure to curb public spending and rein in a ballooning deficit.

But concerns about volatile global crude oil prices and a weak rupee remain, which means that the Reserve Bank of India will have to tread cautiously in lowering rates as it seeks to bolster the economy, economists said.

Analysts added that the country's inflation battle was far from won.

"India still has an inflation problem and is likely to have an inflation problem for the rest of 2012," said Moody's Analytics senior economist Glenn Levine.

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