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Interest rate cuts proved little more than a temporary salve to financial markets on Thursday, with the stock market falling and bonds surrendering initial gains as concerns over the slowing economy remained.

The Reserve Bank of India cut its short-term lending and borrowing rates by 50 basis points each on Wednesday night, saying growth had been hit more than expected by the global financial crisis and downturn.

The stock market opened up more than 1 per cent in its first reaction to the rate cuts, but turned negative within minutes and extended losses to more than 2 per cent in morning trade.

Similarly, the yield on the most-traded 2018 bond fell 21 basis points in early deals, but then unwound most of the move.

"The real issue is not with supply (liquidity). It is the demand which refuses to pick up. Customers and banks continue to be risk averse," brokerage IndiaInfoline said in a note.

"It is the crisis of confidence which is plaguing the markets, not only in India but across the world."

The Reserve Bank of India (RBI) has flooded markets with funds to keep credit flowing since the collapse of Lehman Brothers last September and slashed interest rates to shore up slowing growth, but policy makers say banks have not passed rate cuts on.

India's economic growth slowed much more than expected in the December quarter, slumping to its weakest annual pace in almost six years.

Economic Affairs Secretary Ashok Chawla welcomed the central bank's latest move and said this would provide an impetus for commercial banks to reduce lending rates.

Between December 19 - February 13, banks lent only 81 billion rupees to firms, one-tenth of the 869 billion rupees lent in the same period a year earlier, central bank data showed.

Markets Weak
Shares faltered after starting 1.05 per cent higher on Thursday, and at 11:48 GMT (0618 GMT) the market was down 2 per cent at its lowest since Oct. 27, 2008, the day the market had fallen to three-year lows.

The benchmark 10-year bond yield fell to an intraday low of 6.23 per cent, but pared the fall to 6.42 per cent, two basis points below Wednesday's close.

The rupee weakened back towards 52 per dollar as the stock market fell. The currency hit a record low of 52.2 on Tuesday.

Authorities have cut factory gate duties and the central bank has cut its repo rate by 400 basis points since October in a bid to revive demand and protect growth growth against the global economic slowdown.

But the government's stimulus measures and the economic slowdown have widened the fiscal deficit to an estimated 6 per cent of gross domestic product in the fiscal year ending March 31, up from the previous estimate of 2.5 per cent.

"In the next fiscal year the higher borrowing programme will be the overriding factor as space for more monetary easing remains limited," Kotak Mahindra Bank analysts said in a note.

"We expect the yield curve to gradually steepen on supply pressures.

(Reuters)


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