The Reserve Bank of India (RBI) came out with its Financial Stability Report in June 2015. The half yearly report can be seen as a detailed summarisation of the domestic financial sector, its status of health and future prospects. The report critically analyses the events, global or domestic that can create stress in the banking sector, the engine room of the economy. With the global economy in the throes of financial turmoil and the tail events of the financial crisis still causing repercussions at developed and emerging economies around the world on a regular basis, the significance of the report cannot be emphasised enough. This analysis makes an effort to elaborate and magnify the red flags held up by the report. At the time of publishing of the report, globally, the Greek debt crisis (or rather the return of it) and fears surrounding the Fed interest rate hike presented the biggest volatility trigger mechanism. Recently, however, with Greece accepting the third bailout worth up to 86 billion Euros, the fears have receded but unrest amongst the investors remain; as the IMF remains doubtful on the long term sustainability of the bailout program. Reaction in the Indian markets with respect to the Greek crisis, or the contagion effect, however, had been rather muted.
The risks of the taper tantrum that hammered the Indian rupee and stocks in mid-2013 also appear muted, with the RBI more than prepared to deal with such volatility, should it resurface. To be precise, the worrying factor for the RBI is less of a global factor than the local ones. A strong El Nino has impacted the Indian monsoon season significantly with deficient rainfall across the continent the norm rather than the exception. The impact it would have on the agricultural output and prices can only be estimated with the publication of more data; till now, however, the inflation numbers tell a different story. The domestic economy is still in the throes of a recovery taking shape, which is anything but concrete. The biggest worrying factors for the Central Bank, however, are the stressed balance sheets for the Corporate Sector that are leveraged much higher than comfort levels and that of the Public Sector Banks (PSB), which face the risk of assets turning sour in the face of a hardening of rates… to read full article courtesy by ( http://financelab.iimcal.ac.in/artha/index2.php ) click here