Indian economy is confronting strong global headwinds: RBI

The Financial Stability Report (FSR) warned that the Indian economy remains vulnerable to massive global headwinds, which are acting as a drag on its recovery.

The Indian economy is facing strong global headwinds (unusual external shocks, especially protracted geopolitical hostilities).

“However, sound macroeconomic fundamentals and healthy balance sheets of the financial and non-financial sector provide strength and resilience and generate stability in the financial system.”

In his introduction to the report, RBI Governor Shaktikanta Das noted that the international economic system is facing challenges; Financial markets are in turmoil due to monetary tightening in most parts of the world; food and energy supplies and prices are under pressure; Debt distress beset many emerging market and developing economies; Every economy grapples with multiple challenges.

The Ruler noted that in the midst of these global shocks and challenges, the Indian economy presents an image of resilience. He assured that financial stability has been maintained.

Domestically, we recognize the destabilizing potential of global risks, even as we draw strength from the strong macro fundamentals of the Indian economy. The Reserve Bank and other financial regulators remain vigil and ready to ensure the stability and integrity of our financial system through appropriate interventions, when necessary, in the interest of the Indian economy.

stress tests

The financial stability report said that the downward trend in the ratio of non-performing assets (GNPAs) is likely to continue – according to the stress test framework’s baseline scenario, it is expected to decline further to 4.9 percent in September 2023.

GNPA fell to a seven-year low of 5 percent in September 2022 — down from 5.7 percent in June 2022 and 5.9 percent in March 2022.

Stress test results revealed that Scheduled Commercial Banks (SCBs) are well capitalized and able to absorb macroeconomic shocks even in the absence of any additional capital injection by stakeholders, the report said.

Under the base scenario, the total CRAR (capital-to-risk-weighted ratio) of 46 major banks is expected to decline from 15.8 percent in September 2022 to 14.9 percent by September 2023.

Stress tests indicate that some non-bank financial corporations (NBFCs) may be vulnerable to liquidity shocks. Pockets of tension were observed in selected NBFC groups – NBFC-Investment and Credit Companies (GNPA 6.9 percent) and NBFC-Factor (GNPA 6.8 percent).

The Financial Stability Report indicated that in the financial sector, there is a strong demand for bank credit and early signs of a recovery in the investment cycle occur due to improvement in asset quality, return to profitability, capital flexibility and precautionary liquidity.

These strengths help the financial system to weather external repercussions, tightening global financial conditions and high volatility in financial markets.