The Reserve Bank of India (RBI) on Monday obliquely cautioned that an unstable government after next year’s Lok Sabha elections could hurt economic recovery as policy consistency was critical to attract investment in an otherwise delicate financial environment.
"In India, a potential additional source of uncertainty is the coming general election," RBI governor Raghuram Rajan said in the foreword to the latest Financial Stability Report (FSR).
"A stable new government would be positive for the economy. With confidence in the financial system still fragile, six years into the crisis, policy certainty is something investors look for in the current environment," said Rajan.
The FSR, published every six months, is aimed at, among other things, serving a health check on the financial system.
"Macroeconomic adjustment is far from complete, with persistence of high inflation amidst growth slowdown. Fall in domestic savings rate and high fiscal deficit continue to pose challenges for India," according to the FSR.
The FSR also hinted that RBI’s ability to control inflation through monetary instruments such as interest rate hikes were limited.
Retail inflation shot up to high of 11.24% in November, the highest in nine months, while wholesale inflation during the month stood at a 14-month high of 7.52%
RBI uses lending rates to stymie demand and control inflation. It has raised lending rates twice since September, thereby increasing home loan EMIs.
The central bank also put the onus squarely on the government to tame runaway prices and turn around the economy through speedier project implementation and faster legislative reforms.
"The challenges of containing inflationary pressures limit what monetary policy can do. To maintain the momentum gained by the respite, it is imperative that legislative reforms are pushed through, stalled infrastructure project clearances continue and fiscal consolidation remains on track," it said.
The FSR also warned on non-performing assets (NPAs) —shorthand for loans that don’t yield returns and can turn bad.
RBI said such loans need to be tackled on a priority basis to ensure they do not grow to alarming proportions. "The current level of NPAs do not pose a systemic concern. But we cannot be complacent."
"Failure of a major corporate group could trigger a contagion in the banking system due to exposures of a large number of banks to such corporates," it pointed out.
The US Fed’s decision to delay tapering has helped India prepare better for the financial market volatility, it added.