India’s financial system remains stable and the relatively stronger macroeconomic fundamentals will help weather the emerging risks in the global economy and financial markets.
Releasing the 12th Financial Stability Report (FSR) and the statutory report on Trend and Progress of Banking in India, the Reserve Bank of India on Wednesday said policy makers and stakeholders should be watchful about the adverse impact of developments in global scenario, particularly increased volatility in financial markets and slowdown in global trade.
On the domestic front, risks arising from erratic climatic conditions, limited policy space, corporate performance, asset quality of financial institutions and low investment growth could pose challenges.
The FSR assesses the risks to financial stability and the strength of the financial system, while the trend report highlights the performance and salient policy measures relating to the banking sector including co-operative and non-banking financial institutions, during 2014-15.
Elaborating on the global macroeconomic situation, RBI said that while the first US Federal Reserve rate hike since 2006 appeared to have been factored in by markets, “the pace of further increase may have a significant bearing on market behaviour. This along with the developments in China and sluggish global trade growth would define the global economy going forward.”
The US Fed last week raised its key interest rates by 25 basis points, after nine years, fueling fears in emerging markets that large global funds could move money back to the dollar and cause a disruption in markets everywhere. While the extent of pullout has been muted, foreign portfolio investors have been selling off Indian equities every month, totaling close to Rs 6,000 crore in December so far.
“While India’s macro-economic fundamentals are relatively stronger, domestic demand and private investment are still not picking up, underscoring the need to step up public investments,” said RBI. “Although India’s current account balance has benefitted from the fall in international crude prices and reduction in gold imports, exports have been adversely affected due to weak external demand,” it added.
On December 22, RBI data showed that India’s current account deficit for the quarter ending September narrowed to 1.6% of the gross domestic product, which was lower than last year, mainly due to a drop in trade deficit.
The central bank also said that while the ratio of short-term external debt to forex reserves has been moderating, attracting robust capital flows to finance the current account deficit will require continuous thrust on structural reforms and improving the ease of doing business.
On the corporate sector, RBI said that declining profitability, high leverage and low debt servicing capacity continue to cause concern with their related impact on financial sector, despite the marginal improvement seen during the first half of the current financial year.
The performance of the Indian banking sector remained subdued as it experienced a slowdown in balance sheet growth in 2014-15. While the PSBs registered deceleration in credit growth, the private sector banks and foreign banks showed higher credit growth. Retail loan portfolio of the banks continued to grow at around 20% during 2014-15.