The economy is in a better position today thanks to the dip in inflation, the political stability and the recovery in the external sector, says the RBI’s Financial Stability Report released on Monday.
It, however, also points out that primary market capital activity and banking business have been subdued due to moderate investment intentions. Reiterating what the RBI Governor has been saying, the report cautions about the danger of portfolio money flowing out in the event of bad news relating to growth or financial market shocks. In particular, the heightened interest of foreign portfolio investors (especially those from the US) may create volatility in the event of unexpected changes in the US monetary policy.
Turning back to India, the report says that sustaining the turnaround in business sentiment is contingent on the outcomes on the ground.
While acknowledging that low credit offtake has been due to a combination of factors, including alternative sources of funding, balance-sheet repair, slack demand and an element of risk aversion, the Reserve Bank of India wants banks to prepare themselves to meet credit demand when investment picks up.
Asset quality While capital adequacy ratios were comfortable for the banking sector as a whole at 12.8 per cent, asset (loan) quality continued to be a concern. The gross non-performing assets ratio deteriorated to 4.5 per cent of total bank credit in September 2014 from 4.1 per cent in March. The extent of stressed assets (including restructured loans) was at 10.7 per cent. Loans to five stressed sectors — mining, iron and steel, textiles, infrastructure and aviation — accounted for 24 per cent of all advances of banks and 52 per cent of their stressed advances.
The report said that growth in the third quarter is likely to be muted on the back of a moderate Kharif harvest. It also cautioned that since capacity utilisation in industry has been at its lowest in four years, new investment activity may take some time to pick up. The RBI expects the economy to expand 5.5 per cent this fiscal and pick up gradually in the next fiscal.