In the latest Financial Stability Report of the Reserve Bank of India, a half-yearly publication published on June 28, 2023 since the last issued in December 2022, the financial sector in India has been assessed stable and resilient, but it has been admitted that the recent banking turmoil in certain advanced economies has posed new risks, and therefore both regulators and regulated entities in the country need to stay the course with an unwavering commitment to ensure a stable financial system. “It has to be remembered that seeds of vulnerability often get sown during good times when risks tend to get overlooked,” the RBI Governor Shaktikanta Das has warned.

The IMF in its April 2023 projections expects global growth to slow down further from 3.4 per cent in 2022 and bottom out at 2.8 per cent in 2023. Meanwhile, inflation is easing as if grudgingly and remains at elevated levels. Core inflation, ie inflation excluding volatile food and energy prices, has been more persistent than anticipated.

Central banks have been increasing interest rates, as a tool to contain inflation, however, there are factors continuing in the last 15 years since the global financial crisis of 2008 that increase the severity of the impact of interest rate changes. The factors included growth of global bond markets at much faster than nominal GDP, financial institutions hold higher volumes of securities than before, and a prolonged low interest rate regime that has led to repricing of these securities.

So far, financial market in emerging market and developing economies (EMDEs) have remained largely insulated from spillovers from recent banking turmoil in the Advanced Economies, yet, if instability recurs and is more widespread, it could prompt an increase in global risk aversion, leading to capital outflows from EMDEs as an asset class, the RBI report says.

Furthermore, some of them are faced with serious concerns on debt sustainability. Issuance conditions for sovereign debt have also deteriorated. Smaller and low-income economies are reeling under debt overhangs, difficulties in raising new debt and rollover risks.

Amidst these challenging conditions, India has somehow managed to be stable and resilient so far. Headline inflation has gradually moderated from its peak of 7.8 per cent in April 2022 to 4.3 per cent in May 2023. However, core inflation remains above 5 per cent is a serious concern. The pursuit of price stability while keeping in mind the objective of growth, therefore, remains the overarching priority for the RBI.

The RBI’s overarching priority in understandable in the backdrop of high level of inflation that has aggravated the rising cost-of-living crisis, because there have been less job opportunities and unemployment rate is as high as 8.1 per cent in June 2023, as the latest data of CMIE.

On the one hand there is a severe cost-of-living crisis the common people are reeling under, but on the other moneyed people or businesses both public and private are prospering, which is often quoted as economic development of the country that has little or almost no concern for the common people.

The report, for example, says that healthy balance sheets of banks and corporates are engendering a new credit and investment cycle. Strong revenue growth, higher profits and lower leverage are helping corporates to improve their bottom lines. Banks and non-bank financial intermediaries are posting strong earnings and robust credit growth with strengthening buffers. These improvements are brightening the prospects of the Indian economy, fortified by the rising pace of real economic activity, corporate resilience and sound and efficient financial intermediation.

Led by strong growth in net interest income and significant reduction in provisions, the profit after tax of Scheduled Commercial Banks registered a growth of 38.4 per cent in 2022-23. A recent report by Marcellus has said that India’s top 20 corporates are earning 60 per cent of the cash flow while generating 70 per cent of the entire profit of the country. Projecting all these as India’s growth conceals the predicaments of other people.

India’s financial stability and resilience is thus primarily built for some of the rich people against the entire common population, but there has never been stability and resilience for the common household. The economic stability and resilience of the rich is thus projected as the economic stability and resilience of the country. It veils the frightening ground reality, where people are undergoing unprecedented hardship, while the ruling establishment has been focusing on profiteering of the rich.

Modi government has written off about 13 lakh crore rupees of bad loans in the last nine years to big defaulting business and industries, while RBI has recently allowed further loans to them after settlement of the bad loans, which meant non-payment of loans and a chance to further looting bank money.

Now the financial stability report of the RBI, reports about healthy balance sheets of banks and corporates as a mark of economic growth and resilience. However, everybody knowns that such healthy balance sheets are being presented by help of writing-off bad loans, which is certainly not economic growth and resilience. RBI has praised the banks now for their improving ‘balance sheet’, and made it basis of their comment that India’s financial institutions are on sound footing with robust system. It also talks about declining of NPAs, which was actually effected after writing off bad loans, however these are not result of better performance.

The danger line is obvious, when we take into account that the share of SCBs have declined in March 2023, though they have still the largest bilateral exposures in the Indian financial system. Why this decline? Is it due to better performance of the public sector banks? The report mentions the failure of five banks, but has assured on the basis of a simulated contagion analysis that losses due to their failure with the maximum capacity to cause contagion would not lead to failure of any additional bank.

RBI has quoted its latest Systemic Risk Survey carried out in May 2023, to emphasize that risk across most categories that contribute to domestic systemic risk have receded. However, it remains high for global risks, and medium for domestic macroeconomic risks and financial market risks. Institutional risks have rather increased.

RBI survey has found high risk for global growth, banking turmoil, and monetary tightening in Advanced Economies. Domestically, it has pointed out high climate risks and medium risks for all others macroeconomic, financial market, and institutional risks. (IPA Service)