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Financial Stability Report: Macroeconomic Risks Rose In October, Says RBI Survey

An accomodative monetary policy and government measures may help revive the economy, but short-term pressures remain, it said.

Reserve Bank of India’s regional headquarters in New Delhi. Photographer: T. Narayan/Bloomberg
Reserve Bank of India’s regional headquarters in New Delhi. Photographer: T. Narayan/Bloomberg

An accomodative monetary policy and government measures are likely to help revive economic growth, but short-term economic pressures remain.

Risks to domestic growth, fiscal risk, corporate sector vulnerabilities and household savings were perceived to be in the high-risk category, according to the Reserve Bank of India’s systemic risk survey conducted as part of its Financial Stability Report.

While macroeconomic and institutional risks rose in the October, global, financial market and general risks decreased, according to the survey. Resolution of legacy bad assets under the Insolvency and Bankruptcy Code is essential to enable the banking system to support aspirations of economic growth, it said.

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While the survey showed moderation in liquidity risk between April and October, the RBI’s report said the distinction between the best private NBFCs and non-financial corporates and the rest of these institutions remained pronounced as measured by their commercial paper yields.

With global growth and trade projected to slow further, India’s exports could face challenging demand conditions, it said.

The survey said fiscal deficit risk rose to “high” in October from “medium”. According to the RBI report, revenue shortfall amid weaker private consumption and investment could challenge fiscal parameters.

The central bank, acknowledging the relation between credit offtake and GDP growth, said “the slowdown in the flow of credit to the commercial sector needs reversal”. While credit growth to the very large wholesale accounts continued to rise in share, it was driven by a relatively narrow set of firms, the report said.

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Wading into the ongoing debate over economic fundamentals and market valuations, the central bank said Indian equities remained somewhat expensive compared to its emerging market peers.

The high valuations of the benchmark indices will be sustainable only if there’s a steady rise in corporate earnings, the report said. While the quarterly earnings per share growth of the S&P BSE 500 Index went up in the quarter ended September on an annual basis, it declined for the NSE Nifty 50. Further, future earnings expectations are witnessed a decreasing trend over the six-month period, the report said.

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