India’s stock index rose to a two- month high and the rupee strengthened a third day after policy makers slashed interest rates to a record low and unveiled a second stimulus package to bolster economic growth. The rupee climbed to its strongest in a week on speculation the steps will encourage overseas investors to boost holdings of local assets. The measures on Jan. 2 follow a 200 billion rupee ($4.1 billion) spending plan announced last month. The finance ministry predicts Asia’s third-largest economy will expand as little as 7 percent in the year ending March 31, the slowest pace since 2003. “The rate cuts have been received positively by investors and are seen boosting equities and in turn, the currency,” said Callum Henderson, head of global currency strategy at Standard Chartered Plc in Singapore. “We could see a trading rally in the rupee through part of February.” The rupee rose as much as 1.6 percent to 48.00 per dollar before trading at 48.38 as of 11:47 a.m. in Mumbai, according to data compiled by Bloomberg. The currency’s 19.2 percent loss last year was the biggest since 1991 and the second-worst performance in Asia. The Bombay Stock Exchange’s Sensitive Index, or Sensex, climbed as much as 2.1 percent to 10,168.25. The benchmark is set for its highest close since Nov. 10. The S&P CNX Nifty Index on the National Stock Exchange increased as much as 1.5 percent to 3,091.70. ‘Sharper Than Expected’ The Reserve Bank of India cut its benchmark overnight lending rate, or repurchase rate, on Jan. 2 to 5.5 percent from 6.5 percent. It also reduced the reverse-repurchase rate at which it drains money from the banking system by a percentage point to 4 percent. Both the rates are now at their lowest levels since they were introduced in 2000. “The rate cuts were sharper than we had expected,” said Kenneth Andrade, head of investments at IDFC Asset Management Co. and oversees assets worth $1.8 billion. “The move is positive for capital markets.” The monetary authority also cut the so-called cash reserve ratio, or the proportion of deposits banks must hold in reserve, to 5 percent from 5.5 percent, releasing 200 billion rupees ($4.1 billion) into the banking system. India’s next administration needs to cut borrowing costs further and spend more to revive the economy, Montek Singh Ahluwalia, deputy head of the nation’s top planning body, said in an interview. Prime Minister Manmohan Singh is seeking re- election in May as exporters in India cut about 65,500 jobs amid a simultaneous recession in the U.S., Europe and Japan. The government raised the overseas investment limit in local corporate bonds to $15 billion from $6 billion and lifted restrictions on overseas borrowings and recapitalization of state-run banks. ‘Not Sufficient’ Goldman Sachs Group Inc. and HSBC Holdings Plc said India may need to do more to reverse the slump. Government data showed industrial production unexpectedly fell in October for the first time in 15 years and exports declined for a second month. The “measures are necessary to generate a strong recovery but may not be sufficient,” Robert Prior-Wandesforde, a senior economist at HSBC in Singapore, wrote in a note to clients. “Confidence is key here and that will depend partly on global developments. There is really nothing the country can do to avoid economic pain and job losses over the next few months.” Further Cuts The Reserve Bank may cut its overnight lending and borrowing rates by another 0.5 percentage point each this month as growth slows to as little as 6.7 percent in the year ending March 31 and 5.8 percent in the next, Goldman’s Mumbai-based economist Tushar Poddar wrote in a research note. Goldman predicts the cash reserve ratio will be lowered by an additional 1.5 percentage points. HSBC forecasts the central bank will further reduce the rates and the reserve ratio by 0.5 percentage point each in the coming two months. Banks led today’s gains in Indian stocks as the government plans to give 200 billion rupees to boost the capital of state- run lenders and provide 250 billion rupees for non-bank finance companies. State Bank of India, the nation’s largest, increased 3.1 percent to 1,373.70 rupees. ICICI Bank Ltd., India’s second- biggest, rose 4.4 percent to 491.90 rupees. Both stocks climbed to their highest in more than two months. Overseas investors sold a record $13.1 billion in Indian stocks last year as the Sensex tumbled 52 percent, the most since at least 1979. Offshore forward contracts showed traders pared bets for losses in the Indian currency. Non-deliverable forwards indicate the rupee may trade at 49.51 to the dollar in three months, compared with expectations for 49.97 at the end of last week. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Indian rupee forwards traded overseas are non-deliverable, meaning they are settled in dollars rather than the local currency.

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