India says growth may slow due to global turmoil

Prime Minister Manmohan Singh said on Monday India must brace for slower economic growth because of the global market turmoil, but the country's banks were safe and there was no need to fear any collapse.

Singh told parliament the government and the Reserve Bank of India (RBI) were monitoring the situation and would ensure that additional liquidity infused into the system translated into actual credit and would take more steps if needed.

He said some estimates projected GDP growth to decelerate to 7.5 percent in the current fiscal year to March, with the most pessimistic estimate at 7 percent -- lower than government projections of 8 percent versus 9 percent rise in 2007/08.

"We must be prepared for a temporary slowdown in the Indian economy," Singh said, adding that the global market turmoil would have an indirect impact on the economy.

"The precise impact is difficult to estimate at this point since the depth and duration of the global slowdown remains uncertain."

Pressure on Singh to address the nation had mounted after investor confidence was rattled in recent weeks, with the stock market losing more than half its value this year, the rupee plumbing record lows and as banks grappled with a cash crunch.

"Our first concern was to ensure stability of our banking system. Our banks, both in the public sector and in private sector, are financially sound, well capitalised and well regulated," Singh said.

"There should be no fear of a failure of any bank."

Policy makers have taken a slew of measures in recent weeks as foreign capital was pulled out of the stock market and as credit markets seized up as onshore liquidity evaporated in part because banks were wary of lending.

On Monday, the central bank unexpectedly slashed its main short-term lending rate for the first time in more than four years, lowering the repo rate 1 percentage point to 8 percent, to shield the economy from the global crisis.

"It will have a beneficial effect on the interest rate structure and, in combination with other steps to increase liquidity, will help support economic activity and investment," Singh said.

The RBI has released liquidity of 1 trillion rupees ($20.4 billion) in recent weeks, by slashing the amount of money that banks much keep in reserve with the central bank, to enable more funds for loans.

Singh said the government had also stepped up public spending in anticipation of the slowdown despite criticism when they were announced.

"I am happy to note that it is now widely acknowledged that increased public expenditure is an important part of the solution.

($1 = 49 rupees)