Fin system robust despite global, domestic macro scene: RBI

Despite increasing risks both in domestic and global macroeconomic conditions, the financial system of the country remains robust. However, the concern over evolving global risks and domestic factors still looms large, the Reserve Bank of India (RBI) said in its fifth Financial Stability Report (FSR) on Thursday.

"The financial system of the country remains robust despite increase in risks to stability primarily due to global risks and domestic macroeconomic conditions. RBI's second Systemic Risk Survey revealed concerns about the evolving global risks and a host of domestic factors. Respondents, however, remained confident about the stability of the domestic financial system.," said the report.

Meanwhile, the report has pointed out a moderation in the rate of inflation while recognising two key risks to domestic growth factor: fiscal and external sector imbalances.

India's GDP growth expanded at 5.30% in the first first quarter (Jan-March) of 2012, the lowest quarterly growth rate in last 7 years. Domestic GDP growth declined sharply to 6.5% during 2011-12 from 8.4% in the previous year, weighed by global uncertainties as well as domestic cyclical and structural factors.

Amid tumultous economic situation, both foreign exchange and equity market have corrected wanning investors' interest. According to the FSR, it will continue to experience heightened volatility.

"Developments in Euro area and deterioration in global macroeconomy were among the factors that contributed to stress in the domestic foreign exchange market during the period under review," RBI report observed.

So, can we bank on Indian banks?

"Banks remain resillient to credit, market and liquidity risks and would be able to withstand macroeconomic shocks, given their comfortable capital adequacy positions," the FSR report said.

Amidst concerns over rising cases of debt restructuring, RBI does not see any improvement on asset quality of banks. It is persisting while liquidity pressure too hightening.

"Credit deposit growth in the banking sector have decelerated while banks' reliance on borrowed funds has increased. Banks in India will migrate to Basel III from a position of relative strength but there could be challenges in the form of higher cost of capital," said RBI while suggesting a closer monitoring of the banks.

The next FSR is scheduled to be published in December 2012.

Watch the accompanying video for more details..