Growth rate of economy has moderated: RBI report

The Indian economy has seen a moderation in growth due to risks from the global macroeconomic environment as well as deceleration in domestic demand, according to the Financial Stability Report, released by the Reserve Bank of India, on Thursday.

Domestic demand has decelerated, weighed by global factors as well as domestic headwinds including cumulative impact of interest rate hikes and of elevated inflationary pressures. The slowdown in the industrial sector and deceleration in private consumption may affect the future growth of the services sector as well.

The high cost of inputs, interest rates and deceleration in domestic and external demand is also getting reflected in the declining margins of the corporate sector, the report said.

The country’s external sector faces risks due to decreasing growth in world trade volumes and weakening global demand. The continued high oil prices and increase in imports of bullion have partially offset the recent buoyant export growth, resulting in widening of the current account deficit. Going forward, exports may moderate further if the slowdown in advanced economies persists.  

Faced with external deficit, currency depreciation and risk aversion among foreign investors, Indian corporates could face a challenge with regard to repayments of their foreign borrowing.

Foreign currency convertible bonds raised in the years before the crisis at zero or very low coupons will need to be refinanced through domestic sources at the higher interest rates prevailing currently, the report said.

The direct impact of the Euro area sovereign debt crisis on Indian banks is lily to be muted as they have negligible exposures to the more affected European countries.

However, funding constraints in international financial markets could impact both availability and cost of foreign funding for banks and corporates, some signs of which are already emerging, the report said.

About the profitability of banks, the report said that higher interest expenses and higher provisioning requirements put some pressure on banks’ profitability even as efficiency ratios continued to improve.

Going forward, earnings may be further stressed due to impact of high deposit rates, potential slowdown in credit growth and deterioration in asset quality.