Mumbai: India is caught in a situation where any reduction in lending rate is a difficult proposition, given the liquidity situation and the level of inflation, even as major economies across the world, including China, Japan, the UK and Australia are following up the latest interest rate cut by the US federal Reserve.

The Fed yesterday announced a 50 basis point cut in its key lending rate to 1 per cent from 1.5 per cent. The Fed has reduced its key rate nine times in 13 months - from 5.25 per cent to 1.0 per cent.

China also followed it up with a cut in its interest rate to 6.66 per cent from 6.93.

The rate cuts have sparked speculation that a number of major economies across the world, including Japan, the UK and Australia, are moving towards a zero rate regime.

Bank of Japan, which had followed a zero interest rate policy for most of the time since 1999 till March 2006, is again expected to go back to the zero rate regime after rate cuts in the US and China.

The board of the Bank of Japan is meeting tomorrow to review its current rate of 0.5 per cent - the lowest for any major economy.

Central banks use a zero interest rate policy as a liquidity easing tool among banks. It applies only to the banks parking their funds with the central bank and borrowing from each other.

While a zero rate regime does not guarantee nil interest cost for consumers or corporate borrowers, it, however, reduces the interest rates applicable to borrowers.

Several major central banks have slashed their benchmark rates to sub-five per cent level in the past few days and more rate cut decisions are expected now.

Major central banks, including Bank of England, European Central Bank and Swiss National Bank, had cut key interest rates in a coordinated move with the US Fed.

Other major economies, like Canada, China, Hong Kong, India, Korea, New Zealand, Taiwan, Norway, Slovakia and Sweden have also reduced rates to boost liquidity.

Countries with still-high rates include Brazil, Turkey, Egypt and South Africa. Egypt raised its rate to 11.5 per cent from 11 per cent in September while South Africa raised it from 11.5 per cent to 12 per cent in June this year.