Speaking on the actions, Bharat Dalal, fund manager at Dawnay Day AV Financial Services, said, “Although most of the news has already been factored in, a sentimental boost on the back of the monetary policy is expected next week. A rally up to 3200-3250 on the Nifty is likely, provided 2975 hold. In an extremely optimistic scenario, 3400-3450 could be expected.”

The RBI slashed its two key short-term interest rates by hundred basis points each to stimulate an economy that has been slowing faster than expected. It cut the repo rate, at which it lends cash to banks, to 5.5% from 6.5%.

The reverse repo rate was cut to 4%. RBI announced a cut in cash reserve ratio, the proportion of deposits banks must keep with the central bank, by 50 basis points to 5% with effect from January 17th 2009.

It allowed the preparation of a special financing entity to provide liquidity support against investment grade paper to non-banking finance companies. The RBI has separately infused three lakh crore rupees liquidity into the system by way of cuts in key policy ratios – CRR and SLR. In addition, RBI provided a eleven thousand crore rupees fund to National Housing Bank and the SIDBI in a bid to promote lending to housing and SME segments.

The government realized the need for a second package as industrial output slipped into negative zone for the first time in fifteen years in October. The Index of Industrial Production fell 0.4% during that month. Exports also shrunk for two months in a row, with November figures showing a 9.9% decline.

Addressing the Indian diaspora and the business community at two functions on the second day of his two-nation tour, the Prime Minister maintained that despite the shadow of a slight fall in the growth rate, India would continue to train its sights on investing $500 billion in the economic and social infrastructure over the next five years.

“Due to the current international economic and financial situation, our growth rate may come down somewhat next year. However, we still hope to achieve a growth rate of seven to 7.5% next year. The fundamentals of our economy are strong. Our banking system and financial institutions are well capitalized and secure,” he said. The high-level committee appointed by him to monitor the situation would suggest short and long-term measures to accelerate growth.

The Prime Minister’s observation means that this would be the first time India faces a dip in economic growth after averaging 9% over the last four years.

Dwelling on the macro-economic fundamentals, he pointed out that the domestic savings rate remained at a healthy 35% and was hopeful of the “young demographic profile” leading to a further increase in the rates of savings and investment over the coming years.

Turning to the Indian diaspora in Oman, estimated at roughly 5 lakh, he observed that their annual remittance of over $780 million is a “reflection of your ties with the motherland and your confidence in India.”

The India-Oman Memorandum of Understanding signed on Saturday for setting up a joint investment fund would open the door for greater investment.