By Kartik Goyal and Sam Nagarajan Nov. 11 (Bloomberg) -- India needs to cut interest rates further as two reductions in less than a month haven't been enough to make loans affordable for companies and consumers, a former central bank governor said. Policy makers should lower benchmark rates further ``if necessary'' to enable banks to cut their loan rates, Bimal Jalan, the top official at the Reserve Bank of India from 1997 to 2003, said in an interview yesterday in New Delhi. Measures taken by the central bank and the government in the past month have helped bring the crisis ``under relative control.'' The global financial crisis has led to a shortage of money in India's banking system, affecting lenders' ability to extend loans to companies and individuals. That's eroding consumer demand and has prompted production cuts at companies including Ashok Leyland, the nation's second-biggest maker of commercial vehicles, and JSW Steel Ltd. Demand for domestic loans increased after funds dried up overseas following the seizure in credit markets and the collapse of Lehman Brothers Holdings Inc. on Sept. 15. State Bank of India, the country's largest, cut the rate it charges its best clients to 13 percent last week from 13.75 percent, the highest in a decade. ICICI Bank Ltd., the second biggest, hasn't reduced its 17.25 percent charge. ``We need to create conditions so that loans are available at interest rates at pre-crisis levels, as other sources of finances have dried up,'' said Jalan, 67. ``I am in favor of further reducing the cash-reserve ratio and the repurchase rate, if necessary.'' Slower Growth India's $1.2 trillion economy may expand at the slowest pace in four years, the central bank estimates, as the credit crisis tips the world's industrialized nations into a recession. Larsen & Toubro Ltd., the country's biggest engineering firm, said its borrowing costs will climb in the next six months and DLF Ltd., India's largest developer, last week said its hotel venture with Hilton Hotels Corp. may be delayed by up to 18 months as it tries to secure funds. The benchmark Bombay Stock Exchange Sensitive Index has declined almost 50 percent this year on concern slowing demand will hurt companies' profits. India's central bank cut its benchmark repurchase rate by 1.5 percentage points in two stages starting Oct. 20 to 7.5 percent from a seven-year high of 9 percent. It also lowered the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as 1.4 trillion rupees ($29.5 billion) in cash to ease lending. `Absolutely Appropriate' ``The action taken by the Reserve Bank seems to be absolutely appropriate,'' the Cambridge and Oxford-educated Jalan said. ``The most important thing is giving assurance to all the players that a line of credit is available at a price before all the shakiness started.'' Higher borrowing costs and prices have discouraged spending by consumers who rely on loans to buy cars and motorbikes. Passenger car sales in India fell 6.6 percent in September, the most in more than three years, the Society of Indian Automobile Manufacturers said this week. Vehicles sales, also including trucks, two-wheeled scooters and motorcycles, tumbled 14 percent, the biggest drop in almost eight years, the automobile grouping said Nov. 10. India's industrial production growth grew 1.3 percent in August, the slowest pace of expansion on record. Cooling inflation has given the central bank more room for interest-rate cuts, Jalan said. India's inflation rate, measured by wholesale prices, slowed to a five-month low of 10.68 percent in the week ended Oct. 18 because of waning consumer demand and a decline in commodity prices. ``Circumstances are good as far as inflation is concerned,'' he said. ``If you see a spiking of inflation, then your options become limited.'' To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

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