Reserve Bank of India (RBI) Governor Raghuram Rajan has said macroeconomic fundamentals of the country have improved over the past two years and emerging market economies like India are better placed to face any eventuality.
In the same breath, he cautioned against more volatility, given conflicting action by the developed world.
After the “taper tantrums” starting mid-May 2013, when the Fed hinted at reversing its easy money policy, “a combination of global factors and concerted domestic policy decisions” have helped the country, Rajan said in the foreword to the Financial Stability Report 2015 (FSR) released by RBI today.
“The macro-economic fundamentals have improved and we have also been able to build buffers to fight any future uncertainty,” he said, stressing that “we need to be vigilant”.
“With back-to-back quantitative easing by other major central banks, alongside the possible tightening by the Fed, what we have seen might be only one of a series of such ‘tantrums’ that the global markets are likely to witness.”
Rajan has repeatedly called for policy co-ordination at global forums, saying policies in the developed world driven by domestic needs can adversely impact other developing countries in an inter-connected world.
Reiterating the need for a consensus here, Rajan said: “There is a need to be vigilant about the spillovers (of the Fed ending the near-zero interest rate regime)… For India, what matters is reducing inefficiencies as also improvements in non-price competitiveness.”
He also underscored the need for promoting “healthy innovation while ensuring financial stability”.
The vision for the overall regulatory framework envisages a “balanced, predictable, institution-neutral, ownership-neutral and technology-neutral” regime, he said.
FSR is published by a sub-committee of the Financial Stability & Development Council headed by the RBI Governor.
The sub-committee has representation from the heads of other regulators like Sebi, IRDAI, FMC and PFRDA, apart from the Chief Economic Advisor and the Finance Secretary, among others.
However, if the macroeconomic conditions deteriorate, the GNPAs can go up to 5.9 per cent by March 2016, FSR warned.
The state-run lenders continued to trail private sector when it comes to asset quality, with stressed advances at 13.5 per cent as against 4.6 per cent for the private sector banks.
Under the baseline scenario, the RBI report estimates that public sector banks’ gross NPAs will rise to 5.7 per cent by the end of March 2016.
In his foreword, Governor Raghuram Rajan said the continued stress, coupled with the consequent pressure on capital adequacy, “is a matter of increasing concern”.
He said these 27 state-run banks have a substantial role to play for “sustainable and equitable economic growth” and highlighted that hence the actions taken by government and the RBI to reduce the stress by solving legacy issues and strengthening governance structures are important.
The report said that while the capital ratios for the banking system improved marginally, the state-run banks have continued to record lower CRAR (capital to risk weighted assets ratio).
The state-run banks may have to bolster their provisions further to improve the expected losses in case of a further deterioration in economic conditions, the report said and added that focusing on governance and management processes, along with a re-orientation of business strategies, will help improve the performance of state-run banks in the long-run.
The FSR also said the stress levels in the top ten banks identified as systemically important are higher than the average for the system and therefore their performance will need to be “closely monitored”.
Stating that the RBI front-loaded potential benefits by delivering cuts of 0.75 per cent in the first half of 2015, the FSR said, “price pressures arising from possible sub-normal monsoon remains a significant risk to food and headline inflation.”
Even though the external vulnerabilities have come down, the FSR said “we should not be complacent in an environment of continued uncertainty over global growth and absence of international monetary coordination”.
In the securities market, the FSR flagged concerns over the rapid rise in algo trading, saying this highlights the need for caution, while on insurance, it said agricultural insurance needs urgent focus.
Flagging the high leverage within the corporates as a concern area, the report said this can hinder monetary policy transmission as corporates may not be able to benefit from falling interest rates due to high debt on their books.