The uncertainties in the global environment with persistently high energy and commodity prices have contributed to a slight moderation in India's growth momentum., according to the Reserve Bank of India. In its financial stability report (FSR) released today, the RBI, however, said the macro-economic fundamentals continue to remain strong, notwithstanding the prevailing inflationary pressures and concerns on fiscal fronts.
The report also said the domestic financial markets remain stress-free and are expected to remain so in the near term. However, the liquidity in the system remained in deficit mode given strong credit demand and high level of currency in circulation.
Adding a note of caution, the RBI said the failure of a single bank could have a domino effect on the entire banking system due to the “connected and clustered” structure. This inter-connected structure carries an inherent risk“… The failure of the most connected bank in the system shaves off nearly 14 per cent of the banking system's core capital,” a new analytical technique introduced by the RBI indicated.
The central bank, therefore, underlined the need for continuous monitoring of the interconnectivities in the financial system to identify build up of risks/excesses in the system. The RBI report said the banking stability map indicates that banks' risks to liquidity increased in March 2011 compared with March 2009 and March 2010. However, the risks due to efficiency, asset quality and profitability declined.