India’s central bank slashed key interest rates by 1 percentage point Saturday amid signs of slowing economic growth and damaged investor confidence following the recent terror attacks in Mumbai.

The cut, to take effect Monday, will bring the benchmark repo rate, at which the central bank makes short-term loans to commercial banks, from 7.5 percent to 6.5 percent. That’s the lowest since June 2006 and down from an October high of 9 percent.

The reverse repurchase rate — the rate at which it borrows from commercial banks — was lowered from 6 percent to 5 percent to encourage banks to lend more to consumers.

Reserve Bank Governor D. Subbarao said the moves were designed to “arrest the downturn and revive the growth momentum.” They come amid widespread expectations that India will soon unveil billions of dollars in new stimulus measures to help insulate the country from deteriorating economic and financial conditions around the world.

The central bank has decided to accord priority status to loans granted by banks to housing finance companies (HFCs) for on-lending to individuals for purchase/construction of dwelling units, provided these loans do not exceed Rs20 lakh per dwelling unit per family. However, the eligibility under this measure will be restricted to five per cent of the individual bank’s total priority sector lending. This will apply to loans granted by banks to HFCs up to 31 March 2010.

In view of the difficulties faced by the real estate sector, it has been decided to extend exceptional/concessional treatment to the commercial real estate exposures which are restructured up to 30 June 2009, the RBI said.

To address temporary cash flow problems of viable units in the real estate sector, the RBI will, as a one-time measure, will also make a second restructuring done by banks of exposures (other than exposures to commercial real estate, capital market exposures and personal/ consumer loans) up to 30 June 2009, make them eligible for exceptional regulatory treatment.

The special dispensation for treating loans to HFCs as priority sector lending will boost lending to the housing sector. The facilities for restructuring exposures will help soften pressures being faced by the commercial real estate and other sectors in the current environment, it said.

The RBI said, it will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate.

”The Reserve Bank’s policy endeavour will be to minimise the negative impact of the crisis and to ensure an orderly adjustment. In particular, we will try to maintain a comfortable liquidity position, see that the weighted average overnight money market rate is maintained within the repo-reverse repo corridor and ensure conditions conducive for flow of credit to productive sectors, particularly the stressed export and small and medium industry sectors,” the RBI said.

While the fundamentals of the economy continue to be strong, RBI said a period of painful adjustment is inevitable till calm and confidence are restored in the global markets.

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