RBI's Financial Stability Report: December 2013

The Reserve Bank of India (RBI) has released its Financial Stability Report (FSR) against the backdrop of a mild positive market reaction to the announcement of tapering in the US Federal Reserves’ bond purchase programme from January 2014.

The FSR, which is published every 6 months, reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability. It aims to create awareness about the vulnerabilities in the financial system, to inform about the financial institutions’ resilience to stress and to serve as a health check on the financial system.

 

The following are the highlights of the report from the press release on December 30, 2013:

- The US Federal Reserve has now laid to rest the uncertainty on timing of the exit and tapering in its bond purchase programme, which is set to begin from January 2014. However, financial market volatility will be conditioned by the pace of tapering going forward.

- Realignment of global growth as well as high inflation differential between advanced economies (AEs) and Emerging Markets and Developing Economies (EMDEs) is a potential source of exchange rate volatility and may result in volatile cross-border flows with every repricing of risk.

- The delay in tapering allowed India to bring about adjustment in the current account deficit (CAD) and build buffers by replenishing its foreign exchange reserves. However, macro-economic adjustment is far from complete, with persistence of high inflation amidst growth slowdown. Fall in domestic savings and high fiscal deficit are other major concerns for India.

- Corporate performance continues to be weighed down by boom period expansions and excess capacities, amid shifting asset composition towards financial investments.

- House prices and outstanding loans for housing by housing finance companies have grown relatively faster during the last few years.

- The risks to the banking sector have further increased since the publication of the previous FSR in June this year. All major risk dimensions captured in the Banking Stability Indicator show increase in vulnerabilities in the banking sector.

- Five sectors, viz. Infrastructure, Iron & Steel, Textiles, Aviation and Mining, together contribute 24 per cent of the total advances of SCBs and account for around 53 per cent of their total stressed advances.

- India stands committed to the implementation of the global regulatory reforms agenda and has made considerable progress on this front. Although firms and markets are beginning to adjust to the regulatory approach towards ending too-big-to-fail (TBTF), recent research indicates continued expectation of sovereign support to such institutions.

- India’s domestic markets for interest rate derivatives have not taken off due to the absence of some of the basic building blocks. Efforts are on to address these issues.

- It has been observed that the equity prices of the companies in which the promoters had pledged significant portions of their shares, are relatively more volatile than the broader market during times of correction.