Prime Minister Manmohan Singh on Friday asked his cabinet colleagues to remain alert about the global financial meltdown in the United States.
The cabinet committee on economic affairs (CCEA) chaired by the Prime Minister took stock of the global credit crisis triggered by the stunning collapse of 150-year-old Wall Street investment banking icon Lehman Brothers and the sell-off of another investment banking giant Merill Lynch on Monday.
Singh’s caution came after Finance Minister P Chidambaram briefed the CCEA about the financial crisis in the US while stating the Indian economy was not affected by the developments. “The Prime Minister asked the ministers to stay alert on the global financial situation,” Rural Development Minister Raghuvansh Prasad Singh told reporters after the special CCEA meeting.
On Thursday, Chidambaram said a strong regulatory architecture fortified with prudent norms of checks and balances would prevent India’s banks from falling into a tailspin similar to some of their peers in the United States.
Analysts said almost 80 per cent of the banking system were controlled and owned by the government.
The cabinet’s morale boosting signals cheered the stock markets. The benchmark Sensex notched up 727 points or 5.46 per cent to close above 14,000 after four days.
“The current scenario is more so in the nature of an investment banking crisis rather than a ‘banking’ crisis. It is only a matter of time that investors’ money will find their way back into Indian equities,” Hitesh Agrawal, head of research at Angel Broking said.
Planning commission deputy chairperson Montek Singh Ahluwalia said the meltdown would not have a significant impact on India’s financial system.
“We have not been as exposed to these new and innovative instruments, which have been the source of financial distress internationally,” Ahluwalia said.
“I do not think that direct impact on the Indian financial system is going to be significant at all,” he said.
Fall in real estate prices, triggered by a sub-prime crisis in the US, have set off the squeeze. Sub-prime, refers to a loan given to a borrower who does not qualify for a regular home loan, because of a poor credit record. Banks in the US gave out many such loans in their zeal to keep ahead of their peers in the banking sector.
Close to a trillion dollars have been pumped into the system by central banks and authorities across the world to prevent the contagion from penetrating deeper.