There has been a significant improvement in the macroeconomic environment on the domestic front, and going forward, the economic performance is expected to be better, said a report brought out by the RBI’s Financial Stability Unit.

However, managing expectations continues to be a challenge for policy-makers, as recovery in business sentiment has not yet taken firm roots.

The Financial Stability Report observed that external vulnerability has reduced on account of moderation of the current account deficit and progress has been made on improving the quality of fiscal consolidation.

“Price pressures arising from possible sub-normal monsoon remain a significant risk to food and headline inflation. Concerns remain around falling profit margins and decreasing debt repayment capabilities of the corporate sector,” the report said.

Headline inflation is a measure of the total inflation in an economy and includes components, such as food and energy prices, which are volatile and prone to inflationary spikes.

The report noted that while foreign portfolio flows to India have been strong during the past year, unexpected changes in the monetary policy stance of advanced economies may lead to slowdown/reversal of such flows, with implications for segments of financial markets, even though India is better prepared to deal with volatility as compared to previous episodes.

Immediate concerns

Going ahead, there are two immediate possible concerns for financial market volatility and stability – failure to arrive at a workable solution for the Greek debt crisis, and uncertainty over the timing of rate increase by the US Federal Reserve.

Emerging market and developing economies, including India, therefore need to be prepared for the risks relating to greater volatility in financial markets and reversal of capital flows.

Related Topics
comment COMMENT NOW