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Financial Stability Report

 

Relevance

GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

 

Context

Recently, RBI has released its bi-annual Financial Stability Report. The report highlighted state of Indian economy in the times of pandemic.

 

Key points

  • The policy support has helped the country mitigate the impact of COVID-19. The dent on balance sheets of financial institutions of India has been much lower than the earlier projection. True picture will, however, emerge once the relief measures end.
  • Banks are relatively less affected by the pandemic-induced disruptions, due to various government measures.
  • Public finances have been affected due to increased expenses and substantial reduction in tax revenue. Moreover, the debt-to-GDP ratio is also rising.
  • Our country’s net Foreign Portfolio Investment (FPI) increased due to
    • Stable financial market
    • Favourable economic prospects
    • Easy liquidity condition
  • Our foreign exchange is at all time high crossing $ 600 billion, thus providing respite from the global turbulence.
  • MSME sector has seen a growth in FY 21 largely due to ECLGS (Emergency Credit Line Guarantee Scheme).
  • In the pandemic, bank deposits have increased reflecting precautionary savings by the people.
  • The Gross Non-Performing Assets (GNPA), as of March 2021, has been lower than what was earlier predicted in June 2020. The actual GNPA is 7.5% against the predicted 14.7%.
  • Credit growth may take time to recover due to the sluggish demand, which has been a cause of concern since before the pandemic hit us.
  • Capital to risk-weighted asset ratio (CRAR) has increased to 16% in March 2021.
  • Systemic Risk Survey, which depicts risks of Indian financial system has put the overall risk perception to be ‘medium’.
  • RBI has asked for a comprehensive approach to deal with climate risk assessment in India, similar to the steps taken by the developed countries.

 

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What is Financial Stability Report

  • It is a report published by RBI twice in a year.
  • It presents picture of the status of financial sector in our country.
  • It looks at bank operations and their sustainability to provide credit support to different sectors.

 

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Significance of the report

  • It provides coverage of macro-financial risks, which our economy is facing.
  • The data allows RBI to assess the state of domestic economy.
  • RBI conducts Stress Tests of banks to determine whether banks have enough capital, if there is a situation of negative economic shock.

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