India shows resilience despite hiccups, RBI’s financial stability report says
India is exhibiting resilience even as asset valuations, debt, geopolitical conflicts pose medium term risks, RBI report says
With near-term risks receding, the Indian economy is exhibiting resilience, though stretched asset valuations, high public debt, prolonged geopolitical conflicts and risks from emerging technologies pose medium term risks, the Reserve Bank of India said in its latest Financial Stability Report (FSR).
The Indian economy and the domestic financial system are “underpinned” by strong macroeconomic fundamentals, healthy balance sheets of banks and non-banks, RBI said in the report.
“Notwithstanding the uncertainties shrouding the global macrofinancial ethos as it unfolds,” prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25, RBI governor Sanjeev Malhotra said in the foreword to the FSR.
“Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability,” Malhotra said.
The RBI also expects the economy to grow at 6.6%, under its baseline scenario, driven by a revival in rural consumption, a pickup in government consumption and investment, and strong services exports.
Gross domestic product growth in the July-to-September quarter had slowed to 5.4%, the slowest in seven quarters. India had recorded a growth rate of 8.1% in the year-ago quarter and 6.7% in the April-to-June quarter.
The FSR, which RBI releases biannually with contributions from all financial sector regulators, reflects the collective assessment of the subcommittee of the Financial Stability and Development Council (FSDC). It also provides information on the resilience of the Indian financial system and risks to financial stability.
The report said though the GDP growth in the past quarter was relatively dismal, “structural growth drivers remain intact despite this recent deceleration.”
The report said real GDP growth will recover in the second half of fiscal 2025, supported by a pickup in domestic drivers such as public consumption and investment, strong service exports, and easy financial conditions.
It however cautioned that the softness in industrial activity, especially in the manufacturing sector, moderation in urban demand, global spillovers, and protective trade and industrial policies pose risks.
Caution on crypto
A chapter titled ‘Microfinancial Risks’ in the report discussed the volatile nature of crypto assets.
The regulator said excessive use of crypto assets “can reduce effectiveness of monetary policy, worsen fiscal risks, circumvent capital flow management measures, divert resources available for financing the real economy and threaten global financial stability.”
“Even though the size of crypto-asset markets remains small, their continued growth and increasing linkages with the traditional financial system could pose systemic risks,” the report said.
Crypto-assets swung wildly and the rally, which faded during March-September, was boosted subsequently, especially after Donald Trump won the US election in November.
Bitcoin, the most prominent of cryptocurrencies, more than doubled this calendar year and hit a record high of $108,316 on 17 December.
This has also fueled market capitalization of stablecoins, which are primarily used to enable lending, borrowing and trading of other digital assets and support the crypto ecosystem, it added.
Sign up to our daily newsletter for more updates!