India is more exposed to the global financial markets than other South Asian countries, but its strong fundamentals and pro-active monetary policy management will help it tide over the crisis, a World Bank study has said.
The study 'Global financial crisis : Are storms gathering over South Asia?' said there will be a significant slowdown in South Asia's growth prospects for 2009-10, and particularly notable for Pakistan and India, which is "relatively more exposed... through capital flows... and exposure of domestic financial institutions to troubled international ones..."
In the last five years, price increases of global commodities, especially those of oil, metal and food, budget deficits widened and trade balances worsened.
With this, the growth softened and inflation reached double digits.
"Yet these risks are countered by a fundamentally strong macro economy including prudent foreign debt management, high savings rate, solid financial sector health, and a pro-active monetary policy management that will likely allow India to ride the crisis without destabilising the financial sector," it added.
The study mentions the swift action of the Reserve Bank in injecting extra liquidity into the financial sector, and raising the limit on private foreign borrowing, adding that the global financial crisis is still evolving and there is a significant risk of further slowing down of net capital flows.
"The global financial crisis will likely worsen... particularly on the growth and balance of payments front. Slowdown in global economy will adversely affect South Asian exports and could hurt income from remittances.
Lower foreign capital flows and harder terms will reduce domestic investment. Both will lower growth prospects," it said.