RBI says financial system stable; cautions on growth risks,inflation

Hinting at the possibility of a rate hike in June,it said growth is likely to moderate while inflation is likely to remain firm due to rising commodity prices. “This is expected to have an adverse impact on the fiscal consolidation process. Current account deficit is likely to remain elevated due to rise in imports resulting from higher oil and commodity prices,along with challenges of financing,as global conditions increase volatility in capital flows,” it said.

According to the central bank,high input prices and interest costs may result in downward pressure on margins of corporates. “The aggregate impact of moderately paced global recovery,domestic growth moderation,upside risks to inflation and higher interest rates on the financial sector is likely to remain somewhat adverse during the year,” it cautioned.

“The macroeconomic fundamentals for India,however,continue to stay strong,notwithstanding the prevailing inflationary pressures and concerns on fiscal fronts,” the FSR said. Growth is slackening in most parts of the world,even as the risks from global imbalances and debt crises in Europe continue to hover. The uncertainties in global environment with persistently high energy and commodity prices have contributed to a slight moderation in India’s growth momentum as well.

The first FSR was released by the RBI in March 2010 and the second in December 2010. “Going forward,FSRs will be released bi-annually in June and December,” it said. On the stress testing,the RBI said,“under severe stress scenarios,banks may face liquidity constraints. Banks need to remain vigilant to the headwinds from the prevailing inflation and interest rate situation which may affect their asset quality as changes in interest rate were found to have the most significant (negative) impact on slippage ratio of the banks.”