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The near-term economic prospects appear severely impacted by lockdown-induced disruptions to both supply and demand side factors, diminished consumer confidence and risk aversion, according to the Reserve Bank of India’s Financial Stability Report (FSR).
While financial sector regulators and the government have taken policy measures to ensure financial intermediation functions normally, and distress faced by disadvantaged sections of society is mitigated, the report warned that the downside risks to short-term economic prospects are high.
The FSR observed that policy measures have, so far, kept financial markets from freezing up, and eased liquidity stress facing financial institutions and households. Consequently, borrowing costs have ebbed and illiquidity premia have shrunk.
Risk aversion
“Nonetheless, risk aversion and lackluster demand have impeded the fuller flow of finance from both banks and non-banks into the economy,” the report said.
The central bank cautioned that the pandemic has the potential to amplify financial vulnerabilities, including corporate and household debt burdens in the case of severe economic contraction.
“Restarting financial sector reforms on their path of convergence with global best practices and standards while adapting to the specific requirements of India’s developmental strategy should regain focus, going forward,” it added.
Financial system stable
The FSR noted that the Indian financial system remains stable, notwithstanding the significant downside risk to economic prospects.
According to the latest systemic risk survey, all major risk groups – global risks, risk perceptions on macroeconomic conditions, financial market risks and institutional positions – were perceived as ‘high’, affecting the financial system.
Among macroeconomic risks, risks to domestic growth and fiscal housekeeping were perceived to be ‘very high’, while risks on account of reversal/slowdown in capital flows, corporate sector vulnerabilities, real estate prices and household savings were perceived to be ‘high’.
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