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Indian PM Says Financial Institutions Safe, But Fears Economic Slowdown

The Indian Prime Minister says that Indian financial institutions will not be impacted by the global credit crisis, but admits the country's high-growth economy could slow down. As Anjana Pasricha reports from New Delhi, his assurance came as the country's Central Bank slashed lending rates to ease the credit crunch that is beginning to hurt the Indian economy.

Indian Prime Minister Manmohan Singh told parliament Monday that the Indian banking system is not exposed to the mortgage-backed securities that spawned the current global financial crisis.

"Our banks, both in the public sector and in the private sector are financially sound, well capitalized, and well regulated [some sound of applause] and…there should be no fear of a failure of any bank," he said.

The assurance comes in the wake of a steep fall in the India stock markets in the weeks since the global credit crisis erupted. Investors - both domestic and foreign - have been pulling funds out of the market, creating a liquidity crunch in the country.

On Monday, the Central bank slashed its key short term lending rate by one percentage point to eight percent in a bid to infuse more credit into the economy, and shield it from the global financial crisis. The step is in tune with Central Banks across the world, which have cut interest rates in recent weeks to prop up their economies.

However, Prime Minister Singh admitted that India's emerging economy cannot escape the economic turbulence in the world. He says growth will slow down from the sizzling nine percent witnessed last year.

"The size and impact is difficult to estimate at this point since the depth and duration of the global slowdown remain uncertain. Some estimates project GDP growth to decelerate to seven point five per cent in the current year," he said. "The most pessimistic estimates place it at no less than seven percent. Our effort will be to minimize the impact of the financial crisis and return to the growth trajectory of nine per cent."

Indian leaders are hoping that the economy will escape from a severe slowdown because it is driven largely by domestic demand, and is not as dependant on exports as many East Asian economies.

But analysts point out that the credit crunch has started impacting the broader economy.

They point out that there are fewer buyers for homes, automobiles and other consumer goods ahead of the country's main festival season, when sales are usually brisk.