The blame game between the RBI and the Government for the failure of
the economy to perform should end. They should work together to turn the
economy into a fast performing one keeping the financial sector stable,
strong and healthy.
July 14, 2013:
The IMF and the World Bank in their
financial stability assessment report on India, released in mid-January
this year, observed that the country has made remarkable progress in
developing a stable financial system.
It also states
that the country has developed a regulatory and supervisory regime for
banks, insurance and the securities market that is largely in compliance
with international standards.
However, the report
adds a rider, that despite these, the financial system still faces
long-standing impediments and new challenges to stability.
Stability may be HIT
This
is more or less reflected in the recently released ‘Financial Stability
Report of the Reserve Bank, wherein it states that “while stress tests
reveal that the financial system is resilient to shocks currently,
deteriorating macroeconomic stability can eventually erode financial
stability.”
It is a well-acknowledged fact that the economy is facing a lot of problems for quite some time now.
GDP
growth has been slowing, missing the target by a wide margin. And,
other macroeconomic indicators, such as fiscal deficit, current account
deficit, inflation (particularly retail inflation) and unemployment,
have also deteriorated. The measures taken by the authorities have not
been yielded the desired results.
Agricultural and
industrial production, too, has not been encouraging, and the confidence
level in the economy has also not been good enough to attract
investments.
The financial
system, which is said to mirror the real economy, has been facing the
litmus test of whether it can continue to remain stable and provide
much-needed relief and support to the economy.
The
financial system, which consists broadly of the capital, money, forex,
debt, and bullion markets, accounts for a major chunk of the
transactions in the economy. However, these markets have experienced
volatility of late, thanks to both internal and external factors. The
rupee is on a free fall, the Sensex is swinging both ways, and bond
market yields have gone up.
Also, the banking system has been facing liquidity, credit, operational, forex, and interest-rate risks.
The
challenges before the banking system are many and if it fails to adhere
to the regulatory requirements and, at the same time, does not support
economic growth, its stability is at risk.
Banks
have to necessarily readjust their asset-liability management and
minimise their market borrowings, raise both current and savings bank
account deposits, and long-term deposits beyond three and five years.
They have to avoid short-term deposits and reduce the maturity mismatch too.
The
menace of NPAs (non-performing assets) has to be tackled on a war
footing, and bad loans other than those caused by the economic slowdown
have to be recovered through sale of assets or through effective and
speedy recovery mechanism.
The forex market has been
witnessing ups and downs due to uncertainties in the international
market and on account of domestic issues as well. The external debt as
at end-March 2013 was at $390 billion, a 12.9 per cent rise over the
previous year. It is way above the foreign exchange reserves, which
stood at $288 billion as of June 21.
The trade deficit in May peaked at $20.1 billion, and the foreign inflows are not adequate to finance the deficit.
The measures to contain gold imports have had some positive effect, but the fall in rupee value has partly offset this.
The
stock market has been fluctuating widely, and this has been dictated
largely by FIIs. But this can be to a large extent be prevented if
market regulators/players introduce some innovations in the market.
To
counter the dominance and influence of FIIs, the participation of
retail and NRI investors needs to be considerably improved by increasing
their quota. Similarly, the bond market also needs to be deepened by
marketing infrastructure development bonds by major undertakings with
government guarantees. The takeout finance concept needs better
marketing and encouragement.
The need of the hour is
to strengthen the economy with a strong financial system. The blame
game between the RBI and the Government for the failure of the economy
to perform should end and, instead, they should work together to turn
the economy into a fast performing one keeping the financial system
stable, strong and healthy.
Dr.T.V.Gopalakrishnan
(The author is a Bangalore-based financial consultant. The views are personal.)
(This article was published in Business line on July 14, 2013)
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