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Monday, December 29, 2014

RBI Financial Stability Report: Macroeconomic vulnerabilities have abated significantly

RBI says India's stock markets have been attracting substantial foreign investments increasing the risk of reversal 

* Current weak global growth outlook may prolong easy monetary policy stance in most advanced economies (AEs). 

* Consequently, low risk premia may lead to accumulation of vulnerabilities, and sudden and sharp overshooting in markets cannot be ruled out. 

* Against the backdrop of low interest rates in AEs, portfolio flows to emerging market and developing economies have been robust 

* This increases the risk of reversals on possible adverse growth or financial market shocks, thus necessitating greater alertness. 
 
Domestic developments
* Macroeconomic vulnerabilities have abated significantly in recent months on the back of improvement in growth outlook, fall in inflation, recovery in the external sector and political stability. 

* But, growth in the banking business and activity in primary capital markets remain subdued due to moderate investment intentions. 

Financial sector regulation and infrastructure
 
* CRAR of the scheduled commercial banks at 12.8% as of September 2014 is satisfactory 

* Going forward, the public sector banks would require substantial capital to meet regulatory requirements 

* Need for greater transparency in the process of carrying out a net economic value impact assessment of large Corporate Debt Restructuring (CDR) cases. 

* Another aspect that impinges upon the banks' asset quality is corporate leverage and its impact on banks' balance sheets 

* Indian stock markets have seen a rapid growth in recent months. 

* While the retail investor base still remains comparatively low, India's stock markets have been attracting substantial amounts of foreign investments, increasing the risk of reversal. 
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