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'Economy may slow, but banks are sound'

PM Manmohan Singh asked the country to prepare for a “temporary slowdown”, but assured people that their money in banks was safe and that inflation was headed for a fall, reports Prasad Nichenametla. Will loans rates fall?

business Updated: Jun 04, 2012 18:04 IST

Prime Minister Manmohan Singh on Monday asked the country to prepare for a “temporary slowdown”, but assured people that their money in banks was safe and that inflation, the biggest worry, was headed for a fall.

The prime minister's comments came as the Reserve Bank of India cut the repo rate — the rate that the central bank charges on short term loans to commercial banks — from 9 per cent to 8 per cent, reversing more than two years of tight money policy. Will loans rates fall?

The RBI's decision fueled a stock rally that saw the Sensex close 248 points higher than yesterday, at 10,223. The rupee, however, ended the day at 49 to the US dollar — its lowest in eight years.

“India has faced challenges in the past and has overcome them. We have the strength to overcome the current challenges too,” Singh said. <b1>

The prime minister's statement — that industry body FICCI said would “calm frayed nerves” — comes in the backdrop of plummeting stock market indices and the slowdown hitting a growing part of India's population.

The prime minister outlined steps taken by the government to minimise the “ripple effects” of the global financial turmoil that has shaken investors' confidence and precipitated a steep decline in stock markets worldwide.

“I wish to assure depositors in our banks that their deposits are entirely safe,” Singh said, days after the Sensex fell below 10,000 and ramped up fears of the global crisis hitting Indian banks.

Listing the measures taken by the government, the prime minister spoke about the Rs 25,000 crore pumped into the banking system under the debt waiver and debt relief scheme, the extension in limit of investment by financial institutional investors in corporate bonds from US $ 3 billion to US $ 6 billion and increased public expenditure on social sector schemes.

Singh said the RBI's move to cut the repo rate would have a beneficial effect on the interest rate structure and increase liquidity which would support economic activity and investment.

Singh said RBI and the government were monitoring the flow of credit and would ensure that the additional liquidity infused translated into actual credit.