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

U.S. stocks tumbled on Monday as signs of further deterioration in the economy around the world punctured last week’s market enthusiasm, with financial services companies and retailers among Wall Street’s biggest drags.

Major industrial companies also contributed to losses on signs global demand is faltering, leading investors to pare back risk in favor of safe-haven government debt.

With the holiday shopping season under way, investors feared that retailers may turn in their bleakest sales in many years. The S&P retail index declined 4.4 percent.

Department store Macy’s Inc tumbled 9.6 percent.

Consumers made repeat trips to stores and spent more on bargains this weekend, but analysts said the rush is unlikely to translate into a much-needed boost in profit.

“Things are looking quite bleak. Everyone acknowledges that,” said Brian Gendreau, investment strategist at ING Investment Management in New York. “The question is to what extent is that already priced into the markets. Apparently, not entirely.”

The Dow Jones industrial average slid 383.26 points, or 4.34 percent, to 8,445.78. The Standard & Poor’s 500 Index shed 45.94 points, or 5.13 percent, to 850.30. The Nasdaq Composite Index plunged 82.09 points, or 5.35 percent, to 1,453.48.

In the United States, factory activity fell in November to its weakest since 1982, according to the Institute for Supply Management. The data jolted investors who earlier got news of weaker Chinese and European manufacturing activity.

Top drags included financials, with Citigroup down nearly 9 percent, after an influential analyst forecast more losses for the major U.S. bank. A slide in commodity prices pinned resource stocks in the red, with aluminum producer Alcoa tumbling almost 9 percent.

Among big manufacturers, Caterpillar Inc plunged 8.6 percent, as General Electric slid more than 7 percent.

The market’s slide extended a global equity rout that hurt stocks in Asia and sent European indexes sliding 4 percent or more.

A lower close on Monday would snap a 5-day streak of gains for the S&P 500 stock index. Yields on benchmark 10-year Treasury notes sagged to five-decade lows and prices rose as investors sought the safety of government debt.

Citigroup shares fell to $7.49 on the New York Stock Exchange, while Bank of America slid 8.7 percent to $14.82. The S&P financial index plunged 7.1 percent.

Shares of Caterpillar, a maker of bulldozers and excavators, dropped to $37.33.

Among retailers, shares of department store operator Macy’s Inc tumbled 9.6 percent to $6.71, as those of Wal-Mart Stores , the world’s biggest retailer, shed 3.3 percent to $54.04.

One analyst expected the U.S. credit-card industry to cut $2 trillion in credit lines over 18 months, which would be a severe blow to spending for cash-strapped consumers.

Shares of Alcoa fell to $9.78. Shares of energy companies were another drag as oil prices fell on concerns that the economic slump will hurt energy demand. U.S. front-month crude fell about 8 percent to $49 a barrel.

On Nasdaq, chipmaker Qualcomm Inc was the top drag, falling 6.3 percent to $31.44.

Ellis Mnyandu
NEW YORK, Dec 1 (Reuters)