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RBI Financial Stability Report: Indian economy on the mend but inflation concerns remain

High inflationary pressures, external spillovers and geopolitical risks warrant careful handling and close monitoring, the RBI said.

June 30, 2022 / 04:38 PM IST

India’s economy remains on the path of recovery, but high inflationary pressures, external spillovers, and geopolitical risks warrant close monitoring, the Reserve Bank of India said in its Financial Stability Report released on June 30.

“The Indian economy is facing spillovers from global conditions but remains on the path of recovery. The financial system remains resilient and supportive of economic revival,” the RBI said in the report. “Banks, as well as non-banking institutions, have sufficient capital buffers to withstand sudden shocks.

High inflationary pressures, external spillovers, and geopolitical risks warrant “careful handling and close monitoring,” the RBI said.

Also read: RBI Financial Stability Report: Banks' asset quality improving, GNPAs at 6-year low

Retail inflation came in at 7.04 percent in May, easing from a near-eight-year high of 7.79 percent in the previous month. Inflation, however, has remained above the RBI's medium-term target of 4 percent for 32 consecutive months. More worryingly, it has now spent five months above the 6 percent upper bound of the 2-6 percent tolerance range.

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The rate-setting Monetary Policy Committee (MPC) raised the repo rate by 50 basis points on June 8, almost a month after it had gone for a 40 basis point hike in an off-cycle policy meeting to combat rising price pressure. One basis point is one-hundredth of a percentage point.

The Indian economy appears to have weathered the third wave of the pandemic associated with the Omicron variant, although the war in Ukraine is now casting a “long shadow” on the outlook, the central bank said in the report. The immediate consequence has been a surge in domestic inflation with spillovers to financial markets, it said.

Still, the Indian economy and the domestic financial system remain “strong and resilient” in a hostile international environment, supported by robust domestic macroeconomic fundamentals, the RBI said.

On the back of adequate capital buffers and improving asset quality levels, the Indian banking system is well positioned to support economic growth, with bank credit growing in double digits after a long hiatus, it said. The non-banking system also remains well capitalised. Financial markets, on the other hand, are witnessing heightened volatility because of global spillovers.

Going forward, preserving macroeconomic and financial stability on a durable basis holds the key to reviving India’s tryst with its longer term growth prospects and developmental aspirations, including its emerging role in the global economy, the central bank said.
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