Economic (Opinion): Financial Stability Reports

The RBI's Financial Stability Reports (FSRs) are
- half-yearly assessments of the health of the financial sector.
- is intended to bring India's financial regulatory practices in line with the best in the world.
FSR distinctively focusses on the systemic aspects, rather than the individual components, of the financial sector and evaluates the soft spots in the Indian scene.
According to the latest FSR covering June-December 2011, the domestic financial system remains robust.
- The banking system is resilient enough to tide over unexpected adverse macroeconomic developments.
- Notably, all components of domestic demand have decelerated.
- Inflation pressures remain elevated, driven by a number of factors.
- Risks to the external sector have increased.
- Trade deficit and, along with it, the current account deficit have widened.
- Equity and financial markets continue to be volatile, mainly due to adverse developments abroad.
- There have been large transaction losses on foreign exchange exposures.
- Repayment of external commercial borrowings has become more expensive.
As the year progresses, the slowdown in GDP growth will make the Indian financial sector more vulnerable.
- Banks will have simultaneously to address the related challenges of lower asset quality and raising additional capital, the latter also to comply with the Basel III requirements.
The FSR once again gives a clean chit to the Indian financial sector, but warns of troubles ahead.