What Does the RBI Think of India Now?

Wed, 30 Dec Pre-Open

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The Reserve Bank of India (RBI) recently released the Financial Stability Report (FSR). The FSR is released twice a year by the RBI on behalf of the Financial Stability and Development Council (FSDC). It gives an assessment of risks to financial stability and the resilience of the financial system.

What does this recent FSR say? Well, it's a mixed bag if one assesses the overall conclusion of the report. Let's focus on what according to the report says are the major challenges that lie ahead for the Indian economy.

Macro Risks

To go with other macro economic factors, what can be more important than the recent US interest rate hike? The report states that markets have factored in the effect of this rate hike. However, the pace of further increase may have a significant bearing on Indian markets. And the pace may not be fast. In Janet Yellen's own words, "The monetary policy will continue to remain accommodative". Moreover, the US Fed expects the federal funds rate to be at 1.4% in a year, 2.4% in two years and 3.3% in three years.

Moving further, the report pointed out that private investments have not picked up. This is on account of poor corporate health and their indebtedness. And there can't be high growth for India, we believe, without sustained private sector investments.

Lastly, the report stated that exports have been adversely affected. Indian exports have fallen 12 months in a row. This was on the back of weak external demand. One of our articles from The Daily Reckoning explains this in detail. You can read it here.

Financial System Feel the Stress

The FSR reflected on the soundness and resilience of the financial system. It stated that financial institutions witnessed deterioration in their asset quality. This was due to an increase in the gross non-performing advances (GNPAs). Further, the March-September period saw a reduction in growth of both deposits and credit for scheduled commercial banks (SCBs).

Financial Instability in the Banking Sector

The banking stability indicator pointed out that the risks to the banking sector increased since the last publication of FSR. This was mainly on account of deteriorating asset quality, and sluggish profitability.

Banks have been victims of bad loans and capital insufficiencies for a long time now. Going by that, it would be too early to say that the worst is behind for the banking sector.

In a Nutshell

In its overall assessment the report stated that a recovery for India is underway. Good macroeconomic fundamentals will lend some resilience against the ongoing global uncertainty.

However, it also pointed out that India would be headed in to trouble if it doesn't pay serious attention to domestic concerns. Some of these concerns can be erratic monsoons, poor corporate performance, low investment growth and asset quality of financial institutions. Unless we see good news on these fronts, growth will remain illusory. Only time will tell how the pros and cons will pan out.

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