Indian economy and banking system has the capacity to weather the global financial crisis

October 8, 2008: Finance Minister, Shri P. Chidambaram made the following statement on behalf of the Union Cabinet on the financial situation-

The United States and many countries in Europe are passing through a severe financial crisis. The ripple effects of this crisis are being felt in other countries, including India. The authorities in the US and the Europe have taken a number of bold and unconventional steps in order to stabilise the financial situation. We hope that their efforts will succeed.

2. The main problem is liquidity. In the absence of adequate liquidity, many financial institutions in the US and Europe have suffered a meltdown and they have been bailed out by their respective Governments and Central Banks.

3. As far as India is concerned, the fundamentals of our economy are strong. In the first quarter of 2008-09, the growth of GDP was 7.9 per cent. On current trends, we expect that the growth rate for the whole year will be close to 8 per cent.

4. There are many indicators which underline the sound fundamentals of the Indian economy. For example, during April-August, 2008, exports have increased, in dollar terms, by 35.1 per cent and imports have increased, in dollar terms, by 37.7 per cent. Many sectors have shown impressive growth. There is ample evidence that cumulative investments in the pipeline continue to be high. Huge capacities are being added in a number of sectors including power, steel, oil and automobiles.

5. While there has been a negative trend in portfolio investments, foreign direct investment during the period April to August, 2008, has been robust. India attracted FDI of US$14.8 billion, amounting to 114 per cent of the FDI in the corresponding period of last year.

6. We are conscious of the fact that liquidity conditions in India too have tightened in the last few weeks. Our authorities have responded to the situation. The Reserve Bank of India has taken steps to infuse more liquidity into the market. We will watch the situation carefully and continuously, and respond swiftly to the needs of the market. Steps will be taken to infuse more liquidity, if required.

7. Our banks have strong balance sheets. They are well capitalised. The capital adequacy ratio of each of our banks is well above Basel norms and above the norms stipulated by the RBI. Besides, they are well regulated, and this has been universally acknowledged. Our banks have shown great resilience and continue to provide credit to all sectors of the economy. No one need have any fear about the soundness of India’s banking system.

8. We wish to assure the people of India that the Indian economy has the capacity and the resilience to weather the storm that is blowing across the world. We have enough instruments to ensure the stability of the Indian financial system and we will continue to provide credit and other support for the growth of the Indian economy.

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