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Informist, Monday, Dec. 30, 2024

 

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--RBI releases December edition of Financial Stability Report 
--RBI Malhotra: Prospects for Indian econ seen improving post H1 slowdown 
--CONTEXT: RBI Governor Malhotra's comments from Financial Stability Report 
--RBI Malhotra: Investment scenario bright as cos have robust balance sheets 
--RBI Malhotra: Focus on maintaining fincl stability while supporting growth 
--RBI report:India on strong growth path amid challenging global environment

 

NEW DELHI – The prospects for the Indian economy appear brighter after GDP growth slowed down in Apr-Sept, according to Reserve Bank of India Governor Sanjay Malhotra. The central bank remains focused on supporting higher growth while preserving financial and systemic stability, Malhotra said in his foreword in the December edition of the RBI's Financial Stability Report released on Monday.

 

"Notwithstanding the uncertainties shrouding the global macrofinancial ethos as it unfolds, prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25," Malhotra said. "Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability," the governor said. 

 

India's GDP growth fell to a seven-quarter low of 5.4% in Jul-Sept, which prompted the RBI, the government and economists to lower the growth projections for FY25. The RBI earlier this month lowered its GDP growth forecast for FY25 by 60 basis points to 6.6%. The finance ministry last week said that it expects the economy to grow around 6.5% in FY25, lower than the 6.5-7.0% growth projected in the Economic Survey.

As 2024 comes to an end, the global economy has exhibited resilience amid headwinds from political, geopolitical, and economic fragmentation risks, Malhotra said, adding that the likely fall in inflation will continue to support global economic prospects. The medium-term outlook, however, remains challenging with risks present from the possible intensification of geopolitical conflicts, sporadic financial market turmoil, and rising indebtedness, the RBI governor said. 

 

Back home, the Indian economy remains on a strong growth trajectory underpinned by robust macroeconomic fundamentals, the Financial Stability Report said. Financial sector regulators are also stepping up reforms and increasing surveillance against a sound financial system backdrop, Malhotra said. India's financial sector has remained resilient thanks to robust earnings, low levels of impaired assets and strong capital buffers.

 

According to the Financial Stability Report, stress test results reveal that the capital levels of the banking system as well as of the non-banking financial companies sector will remain well above the regulatory requirement even under adverse stress scenarios.

 

The results of the stress tests show that the aggregate gross non-performing assets ratio of the 46 banks in India may rise to 3.0% in March 2026 from a 12-year low of 2.6% in September under a baseline scenario. Under adverse scenario 1 and adverse scenario 2 of the stress tests, the aggregate gross non-performing assets ratio of the banks may rise further to 5.0% and 5.3%, respectively, by March 2026.

 

Adverse scenario 1 assumes persisting geopolitical risks and an escalation of global financial market volatility, which leads to higher commodity prices and a jump in domestic inflation. In this scenario, domestic monetary policy tightens and the spread between policy and lending rates widens.

 

The second adverse scenario assumes that global and idiosyncratic risk factors blend to trigger a synchronised sharp growth slowdown in key economies, and spillovers impact domestic GDP growth. This scenario further assumes that although the central bank eases monetary policy, incomplete monetary policy transmission due to high uncertainty widens the spread between policy rate and lending rate.

 

According to the stress test, the gross non-performing assets ratios of public sector banks may rise to 7.3% in March 2026 from 3.3% in September under the second adverse scenario, whereas it may go up to 2.9% for private banks from 1.9%. For foreign banks, the gross non-performing assets ratio could rise to 1.4% by March 2026 from 0.9% in September under the second adverse scenario. 

 

In another stress test, the capital-to-risk-weighted assets ratio of 46 major banks fell to 16.5% by March 2026 from 16.6% as of September end in the baseline scenario, while it declined to 15.7% in adverse scenario 2. "No bank would fall short of the minimum capital requirement of 9% under both the scenarios. However, under adverse scenario 1, SCBs' (scheduled commercial banks) aggregate CRAR (capital-to-risk-weighted assets ratio) may deplete to 14.3% and four banks may breach the minimum capital requirement of 9%," the report said. 

 

As per the report, the profitability of banks improved during Apr-Sept, with profit after tax surging by 22.2% on year. Public sector banks and private sector banks recorded a net profit growth of 30.2% and 20.2%, respectively, while foreign banks saw a net profit growth of 8.9%.  End

 

Reported by Shubham Rana

Edited by Saji George Titus

 

 

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