As part of its stimulus plan, the government eased inflation controls and raised the overseas investment limit to $15 billion from $6 billion. India’s federal government also green-lighted state-level initiatives to raise an additional $6.18 billion (300 billion rupees) in the year to March 31 for infrastructure projects such as roads, schools and hospitals.

The government will also offer $4.12 billion (200 billion) rupees to state-run banks and $5.15 billion (250 billion rupees) to non-bank finance companies to raise capital, The Wall Street Journal reported.

To make this possible, India lowered the cash reserve ratio – the proportion of deposits banks are required to set aside as cash – by a half percentage point to 5%, effective Jan. 17.

“It is expected that the reduction in the policy interest rates and the CRR [cash reserve ratio] will further enable banks to provide credit for productive purposes at appropriate interest rates,” the Reserve Bank said in a statement.

Though India isn’t likely to sink into recession, the global financial crisis has no doubt blunted that country’s growth prospects – as its currency, stock market, consumer demand and production have all taken sharp losses in 2008.

“There’s still scope for rate cuts as the economic picture is quite bleak,” K. Ramanathan, who manages the equivalent of $2.2 billion in Indian debt at ING Investment Management in Mumbai, told Bloomberg. “The policy response to the unfolding economic slowdown is quite satisfying.”

Anticipation of the news of the rate cut and stimulus sent India’s benchmark Sensex 30 Index to a two-week high. The country’s benchmark 10-year bond yield dropped to 5.10%, down from 5.39% the day before.

The Sensex fell 52% in 2008, its biggest drop since data became available in 1980, and possibly its largest drop ever.

In the quarter ended Sept. 30, India’s economy grew at a 7.6% pace, better than expected but also its slowest pace in almost four years. The World Economic Forum (WEF) and Confederation of Indian Industry predict India will grow at a rate of 7.4% to 7.8% in the 2008-2009 fiscal year.

A recession is “not going to happen,” said Karim Rahemtulla, a Money Morning guest columnist Karim Rahemtulla who observed firsthand India’s prospects last year when he led an investor’s field trip around the country.

But Rahemtulla was just as quick to credit the Reserve Bank of India for taking action as the global financial crisis spread across the world.

“They have explicitly stated they will aggressively promote fiscal and monetary stimulus to promote growth,” Rahemtulla said.

India’s current fiscal year ends March 31, 2009. This is the fourth time since October the government has lowered its primary interest rate.

“The fundamentals of our economy continue to be strong,” the Reserve Bank said. “Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply. But a period of painful adjustment is inevitable.”

India Starts 2009 With More Rate Cuts and Stimuli