Mumbai, June 28: The Reserve Bank of India today said that risks to financial stability had worsened since December because of a cocktail of global factors and domestic macroeconomic conditions.
In its latest Financial Stability Report — a document that it brings out twice a year — the central bank said the risks to domestic growth were accentuated by fiscal and external imbalances. It flagged four key factors that posed threats to stability in India: the global sovereign debt problem, the domestic fiscal position, the widening current account deficit and the structural aspects of food inflation.
The report said both fiscal and primary deficits had increased in 2011-12. It said an elevated ratio of revenue deficit to gross fiscal deficit and the increasing proportion of revenue expenditure relative to capital flows were also disquieting. A lot would now depend on the government’s ability to come good on its commitment to cap its expenditure on subsidies within the stipulated cap of 2 per cent of GDP in 2012-13.
The RBI said the rupee was badly roiled over the past six months because of the turmoil in the Euro area, a widening current account deficit and perceptions of a slowdown in policy making in India.
The report does have a positive side: it says the country’s financial system remains robust with Indian banks being extremely well capitalised. It adds that the recent decline in international crude oil prices, if sustained, can provide relief to the economy. “A normal monsoon could also alleviate pressures … and provide impetus towards reviving the domestic economy,” it said.
The RBI said credit growth in 2011-12 had decelerated to around 16.3 per cent from 22.6 per cent in March 2011, reflecting the overall slowdown in the economy. Deposit growth had also dipped to under 14 per cent — the lowest growth rate in the past 10 years. The sharp slowdown in deposit growth had forced banks to rely more on borrowed funds which, it said, “may translate into liquidity risks”.