India's financial system remains robust, but the risks to stability have increased since December largely due to global events and the dismal domestic economic performance, the country's central bank said in a report on Thursday.
Citing its second Systemic Risk Survey, the Reserve Bank of India said respondents were concerned about the evolving global risks and a host of domestic factors.
"Respondents, however, remained confident about the stability of the domestic financial system," the central bank noted.
Though inflationary pressures have moderated, inflation risks remain, the report said. The fiscal and external sector imbalances are worsening the risks to domestic growth, it pointed out.
Foreign exchange and equity markets have corrected and continue to experience heightened volatility, the RBI said. The bank blamed the rapid depreciation of the rupee on the euro area crisis, the country's widening current account deficit and perceptions of slowdown in policymaking.
The Indian rupee has been steadily weakening against the U.S. dollar in recent months. The currency breached the 57 mark last week to hit a record low 57.33.
The government on Tuesday announced a slew of measures to stem the slide of the rupee. The measures include raising the limit of the external commercial borrowings of companies and the maximum limit for foreign institutional investment in government securities.
After Pranab Mukherjee stepped down as Finance Minister earlier this week to contest the presidential polls, the ministry has been taken over by Prime Minister Manmohan Singh. After a meeting yesterday, he urged his economic advisors to revive the 'animal spirit' of the economy.
Recently, Standard & Poor's as well as Fitch Ratings warned India on its economic prospects and downgraded the country's rating outlook to Negative. Meanwhile, Moody's maintained the Stable outlook on India's sovereign rating despite credit challenges.
"A change in the current external rating of the country could have 'cliff effects', impacting both, the availability and the cost of foreign currency borrowing for Indian banks and firms," the RBI report said.
S&P even warned that India could be the first nation among the BRIC to lose its investment grade rating. The RBI report said domestic equity markets reflecting weak sentiments.
Indian banks are well capitalized, though trends in asset quality and their ability to withstand sustained liquidity pressures pose some concerns, the central bank said. The banking system remained resilient even under extreme stress scenarios, it added citing the results of a stress test.
by RTT Staff Writer
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