RBI warns against worsening risks to financial stability

The Reserve Bank of India (RBI) on Thursday warned that risks to financial stability in the country have worsened in the last six months primarily due to global risks — especially from the eurozone — and domestic macroeconomic conditions,though the financial system is still “robust”.

Maintaining that “risks to domestic growth are accentuated by fiscal and external sector imbalances”,the RBI’s Financial Stability Report (FSR) cautioned that 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. S&P and Fitch have already warned of a downgrade of India’s rating.

“The Systemic Risk Survey… revealed that financial sector stakeholders continued to repose confidence in the stability of the domestic financial system,” it said. The level of confidence,however,seems to have diminished since the previous survey. Market volatility emerges as the chief concern of respondents along with the risks associated with high levels of fiscal and current account deficits. “Policy risk (including perceived slowdown in policy making) also emerges more prominently in the current survey,” it said.

Expressing concern over the government’s fiscal management,it said,“Fiscal risks remain elevated,given that both fiscal and primary deficits have increased during 2011-12.”