March 4 (Bloomberg) -- India’s central bank cut interest rates for the fifth time since October after economic growth slowed to a five-year low.

The Reserve Bank of India reduced the benchmark repurchase rate to a record low of 5 percent from 5.5 percent and the reverse repurchase rate to 3.5 percent from 4 percent, according to a statement on its Web site today.

Governor Duvvuri Subbarao is driving policy rates down to unprecedented lows to revive investment and spur consumption in Asia’s third-largest economy. The $1.2 trillion economy is slowing as exports decline and access to funds for companies from overseas and the stock market is cut off by the global recession.

“Investments will get hurt by the global downturn,” said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor’s. “I expect the Reserve Bank to cut rates further by another 50 basis points before April.”

The deepening global recession and slumping share markets, including a 13 percent decline in India’s key stock index this year, have forced policy makers around the world to slash borrowing costs.

The U.S. Federal Reserve’s benchmark rate is close to zero, the Bank of England’s is the lowest since its creation in 1694 and the European Central Bank will probably trim its main rate on March 5 to 1.5 percent, the lowest level in 10 years of setting policy, according to economists.

Subbarao has room to slash rates because falling commodity prices have slowed inflation to a 14-month low of 3.36 percent from a 16-year peak of 12.91 percent in August.

Bank Credit

“It is expected that the reduction in the policy interest rates will further encourage banks to provide credit for productive purposes at viable interest rates,” the central bank said in its statement. “The Reserve Bank on its part would continue to maintain ample liquidity in the system.”

India’s economy expanded 5.3 percent in the three months to Dec. 31 from a year earlier after a 7.6 percent gain in the previous quarter, the statistics agency said last week. That was less than the 6.1 percent predicted by economists.

India, which grew an average 9 percent in the past four years, is facing the brunt after trade as a percentage of GDP rose to 35 percent in the year ended March 31, 2008, from 21 percent in 1997-98.

High-Cost Deposits

The nation’s exports declined last quarter for the first time in seven years. Local demand has been hit because commercial banks, laden with high-cost deposits, have been slow to reduce lending rates.

Prime Minister Manmohan Singh’s government has backed the monetary stimulus by lowering taxes and increasing spending on infrastructure.

Acting Finance Minister Pranab Mukherjee Feb. 16 lowered excise duty to 8 percent from 10 percent and the service tax to 10 percent from 12 percent. He extended a 4 percentage point cut in central value-added tax announced in December beyond March 31.

Before today’s announcement, the combined stimulus from interest-rate cuts, increased government outlays and lower taxes totaled almost $80 billion, or 7 percent of India’s gross domestic product, according to the central bank.

Overseas borrowing and the sale of new shares on the stock market provided Indian industry with about 40 percent of total funding in the year ended March 31, 2008, according to Tehmina Khan, an economist at Capital Economics Ltd. in London.

Budget Deficit

Still, the fiscal spending is straining the budget deficit, which the finance ministry forecasts will widen to 6 percent of GDP in the year ending March 31 from a target of 2.5 percent. The government expects borrowing next year to increase to a record 3.62 trillion rupees ($72 billion). Indian government debt is the equivalent of 80 percent of the nation’s GDP.

Yields on India’s benchmark bonds due in 2018 have risen 1.19 percentage points to 6.44 percent this year because of deteriorating government finances.

“Such sizeable budget deficits are unsustainable,” said Rajeev Malik, regional economist at Macquarie Group Ltd. in Singapore. “The next government will have to focus on fiscal consolidation and privatization in a big way.”

The government, whose five-year term comes to an end in May, wants to prop up growth and reduce unemployment as it prepares to face general elections.

Junk Rating

Standard & Poor’s said Feb. 24 that the nation’s credit rating may be cut to junk as government debt reaches a level that’s “not sustainable.” S&P lowered India’s rating outlook to negative from stable.

Mukherjee the rating company’s move was “not unexpected” and that the global decline requires “extraordinary steps from the government.”

Already, companies have cut about half a million jobs in the three months ended December, according to the labor ministry.

Apollo Tyres Ltd., the Indian tire maker partly owned by Michelin & Cie, said this month it plans to cut its workforce by 15 percent, or 1,500 employees. A survey of 50 textile companies by the Apparel Export Promotion Council of India released this month found they reduced 14 percent of their workers in November.

The government predicts economic growth will slow to 7.1 percent in the year to March 31. Even though that pace makes India the second-fastest after China among the world’s largest economies, it’s not enough to generate jobs in a country where the number of people looking for employment increases by more than 10 million each year.

The International Labor Organization forecasts India needs at least 10 percent growth a year for a 1 percent increase in employment.

“Rate cuts will help,” said Tarun Jain, executive director of finance at Sterlite Industries (India) Ltd., a Mumbai-based metals company. “But you would need to cut rates by another 200 to 300 basis points to step up growth.”

To contact the reporters on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

Last Updated: March 4, 2009 11:06 EST