RBI: political instability after LS elections will hit economy

The Reserve Bank of India (RBI) cautioned that any political instability after theLok Sabha elections in 2014 will drag the besieged economy further down, except there is a stable new government at the centre. On the release of the 8th edition of the RBI’s Financial Stability Report 2013, RBI Governor Raghuram Rajan stated that any political instability after general elections will lead to erode investor’s confidence in the economy. A stable new government would be positive for the economy.

Excerpts of the 8th edition of the RBI’s Financial Stability Report 2013

• The gross Non-Performing Assets (NPAs) in the system will rise to Rs.  2.29 lakh crore by September 2014 from Rs. 1.67 lakh crore in September 2013.
• External sector risks have been considerably reduced and the effect of the tapering on the economy is expected to be limited and short-lived.
• The delay in the tapering of the $85 billion-a-month bond buyback programme by the US Fed till January 2014, has given the country time to replenish the forex reserves and rein in the high current account gap.
• Realignment of global growth as well as high inflation differential between advanced economies (AEs) and Emerging Markets and Developing Economies (EMDEs) is a potential source of exchange rate volatility and may result in volatile cross-border flows with every reprising of risk.
• Corporate performance continues to be weighed down by boom period expansions and excess capacities, amid shifting asset composition towards financial investments.
• Five sectors – infrastructure, iron and steel, textiles, aviation and mining together contribute 24 per cent of total advances of Scheduled Commercial Banks (SCBs) and account approx 53 % of their total stressed advances.
• House prices and outstanding loans for housing by housing finance companies have grown relatively faster during the last few years.
• Inadequate social security coverage in India against a backdrop of changing demographics will pose challenges for expanding the pension system given the fiscal constraints. The National Pension System (NPS) created to serve Government employees and private sector workers.

Note: RBI publishes Financial Stability Report (FSR) in every six months. Its’ purpose is to create awareness about the vulnerabilities in the financial system and to inform about the resilience to stress of the financial institutions and to generally serve as a health check on the financial system.