Mumbai, June 28: India’s financial system “remains robust” but challenges to stability have increased in recent months owing to global economic uncertainty and sluggish domestic growth, the Reserve Bank of India (RBI) said Thursday.
“Threats to stability are posed by the global sovereign debt problem and risk aversion, domestic fiscal position, widening current-account deficit and structural aspects of food inflation,” the central bank said in its Financial Stability Report.
It said the country is likely to face higher inflation risks.
“Inflation risks are likely to remain high, given the persistence of overall inflation, even in the face of significant growth slowdown which points to serious supply bottlenecks and sticky inflation expectations.”
The overall inflation moved up to 7.55 percent in May as compared to 7.23 percent in the previous month. Food inflation re-entered the double-digit zone after a gap of six months in April 2012 and the upward trend continued in May.
Food inflation rose to 10.74 percent in May as compared to 8.25 percent in the previous month as vegetables, pulses, milk, eggs, meat and fish became costlier.
The RBI systemic risk survey revealed concerns over evolving global risks and a host of domestic factors, but “respondents (to systemic risk survey) remained confident about the stability of the domestic financial system,” the report said.
“Banks remain resilient to credit, market and liquidity risks and would be able to withstand macroeconomic shocks, given their comfortable capital adequacy positions,” it said.
The report highlighted that high fiscal debt and external factors are major risks to the domestic growth and that though inflationary pressures might have moderated, inflation remains a clear and present danger to the economy.
“Risks to domestic growth are accentuated by fiscal and external sector imbalances. Inflationary pressures have moderated but inflation risks remain.”
As per the recent data released by the Central Statistics Office, India’s industrial output grew marginally by 0.1 percent in April due to poor show of capital intensive mining and manufacturing sectors.
The factory output, measured in terms of the Index of Industrial Production (IIP), declined by 3.5 percent in March, the first such contraction in factory output since October 2011, when it shrank by 4.7 percent.
The GDP expanded by only 5.30 percent in the first first quarter of 2012, the lowest quarterly growth rate in last seven years.
RBI said that there are concerns over rising cases of debt restructuring and credit deposit growth in the banking sector has decelerated.
“Credit deposit growth in the banking sector have decelerated while banks’ reliance on borrowed funds has increased. Banks in India will migrate to Basel III from a position of relative strength but there could be challenges in the form of higher cost of capital,” said RBI while suggesting a closer monitoring of the banks.
The next FSR is scheduled to be published in December 2012.