Prime Minister Manmohan Singh assured Parliament that no bank would fail and deposits were safe but warned that the global financial storm would bring about a temporary slowdown in the Indian economy, the precise impact of which was difficult to assess.Making a statement in Lok Sabha, the PM said, “Our banks, both in the public sector and private sector, are financially sound, well capitalised and well regulated. There should be no fear of a failure of any bank. In particular, I wish to assure depositors in our banks that their deposits are entirely safe.” The decision to address the House came after more than two weeks of market instability and an uneven response to the series of measures taken by the government to ease the credit squeeze in the wake of major banks collapsing under debt burden. The PM sought to assure nervous investors and a gloomy public that exposure of Indian banks to toxic assets was “minimal”. Referring to the RBI announcing a cut of 100 basis points in the repo rate — the rate at which banks can borrow — he said, “Government welcomes this decision. It will have a beneficial effect on interest rate and in combination with other steps to increase liquidity, will help to support economic activity and investment.” The PM said the global turmoil had led to a contraction in commercial credit. “External commercial borrowings, which are used by the corporate sector, have dried up, as have international suppliers credits. This has led to a reduction in overall credit... and produced a liquidity crisis in the system,” he said. The government was working to ensure that additional liquidity did result in expanded flow of credit to industry, trade and business.Both RBI and government are monitoring the situation and “will ensure the additional liquidity infused into the system translates into actual credit. We will not hesitate to do more if needed,” the PM said. He pointed out that the capital adequacy ratios of all banks were well above prescribed norms and some with lower ratios would be aided in accessing funds.Pointing to the prospects of a “prolonged recession” in industrialised countries, the PM said that the crisis has been described as the worst since the Great Depression of the 1930s but was hope ful that steps to infuse liquidity into the Indian markets would work. He said CRR had been cut by 250 basis points, funds made available to mutual funds and Rs 25,000 crore advanced to banks for farm debt waiver. The PM did, however, underscore that some pain was inevitable. Despite increase in exports in dollar terms during April-August, FDI in the same period totalling $14.8 billion and first quarter growth of 7.9%, he said “...we must be prepared for a temporary slowdown in the Indian economy.” He made it plain that no firm estimates were available. Some estimates project GDP to decelerate to 7.5% in the current year while others place it lower at 7%. With Indian economy losing some of its breakneck pace, the government would seek to “minimize” the negative effect of the financial crisis till the global situation stabilises. The PM said the RBI amd finance ministry have issued advisories that borrowers be provided adequate credit and working capital while banks make available funds for investment and credit to mutual funds. The PM pointed out that MFs and NBFCs were an important part of the larger financial system.The PM noted with satisfaction that the wholesale price index was declining and though the current rate remained high, the movement of prices showed a “clear deceleration in the current momentum of inflation”. “We expect a further reduction in the index in the next two months,” he said. Defending the government’s spending plans, he said public expenditure was an important part of the solution. “Our expenditure on education, health, NREGP, JNNURM and other such programmes have helped the economy in difficult times,” he said.
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