India's central bank says financial system well regulated

Washington/New Delhi, Oct 11 (IANS) A day after Indian equities crashed in line with the global meltdown and on worries over declining industrial growth, Reserve Bank of India (RBI) Governor D. Subbarao has said overseas exposures of domestic banks were small and that the country's financial system remained well-regulated.

'What we are witnessing today in the Indian markets is an indirect, knock-on effect of the global financial situation,' said Subbarao, ahead of the annual meeting of the International Monetary Fund (IMF) in Washington that starts later Saturday.

'This is only a reflection of the uncertainty and anxiety in global financial markets,' added the central bank governor, who is representing India at the meeting as Finance Minister P. Chidambaram cancelled his visit at the last minute.

'The banking sector through overseas branches has some exposure to distressed financial instruments and troubled financial institutions. But this exposure is part of the normal course of their business and is quite small relative to the size of their overall business.'

Maintaining that Indian banks do not have any direct exposure to the sub-prime mortgages, the central bank governor further said the Indian banking system and the foreign exchange market were sound and well regulated.

'The fundamentals of the Indian economy have been strong and continue to be strong,' he said, adding: 'There is no reason for any anxiety or uncertainty.'

Subbarao's remarks came against the backdrop of a key Indian stock market index closing with one of its steepest losses in recent months, with interventions by the government and regulators having little impact on lifting the battered sentiments.

Banking stocks were particularly hit, with ICICI Bank, the country's largest in the private sector, crashing 26 percent on the Bombay Stock Exchange, while Axis Bank and HDFC Bank lost 15.64 percent and 5.93 percent, respectively.

While Chidambaram announced a panel under Finance Secretary Arun Ramanathan to study the impact of the global financial turmoil on the Indian economy, the central bank reduced the cash reserve ratio for commercial banks - the minimum balance they have to keep - by 100 basis points to inject more liquidity into the system.

But the news that shattered the already battered mood was that the country's industrial production based on official data had expanded by a mere 1.3 percent in August which was the lowest growth in a decade.

'Our policymakers seem to be in a denial mode,' said noted business economist D.H. Pai Panandikar, referring to statements by Chidambaram and regulators that the main problem in the Indian financial system was liquidity.

'Yes, liquidity is a problem and I am glad the finance minister says so. But the markets have crashed, rupee is sliding, there is a global turmoil and inflation remains high. All this could affect our growth,' Panandikar, who is president of RPG Foundation, a think tank, told IANS.

Industry lobbies like the Associated Chambers of Commerce and Industry (Assocham) now warn that if corrective measures like interest rates cuts, reduction in input costs and infrastructure needs are not taken, the situation could worsen and adversely affect India's growth.