Stable govt at the Centre makes prospects of economic recovery appear bright, says RBI

Adverse growth-inflation setting that has obtained over the last two years is posing a major challenge to economic recovery, said the Reserve Bank of India (RBI). It, however, conceded that the moderation in consumer price inflation and reduction in twin-deficits had provided some breather.

The RBI said formation of a stable government at the Centre had made the prospects of economic recovery appear bright. However, it felt that supply-side constraints needed to be addressed to complement its efforts to contain inflation expectations. The RBI made these observations in the Financial Stability Report June 2014, the ninth issue of the half-yearly publication, released on Thursday.

“A strong push to implementing policy is expected to provide the necessary impetus to the investment cycle. Recent policy measures and timely interventions have proved to be effective in containing external sector risks but there is a need to work towards reducing structural current account imbalances,” the report said.

The RBI said Indian capital markets reflected the expectations on policy measures to address the adverse growth-inflation dynamics and saving-investment balance.

“India’s financial system remains stable, though the banking sector is facing some major challenges, mainly relating to public sector banks (PSBs). Although there has been some improvement in the asset quality of scheduled commercial banks since September 2013, the level of gross non-performing advances as percentage of total gross advances of PSBs was significantly higher as compared to other bank groups” the report said.

While the ownership pattern and recapitalisation of PSBs were contingent upon government policy and the fiscal situation, there was a case for reviewing the governance structures of PSBs, with a greater emphasis on market discipline, it added.

Mutual funds and other asset management activities in Indian markets did not carry risks similar to those experienced in other countries, it said. The lending activity of insurance companies needed to be streamlined and monitored to eliminate the possibility of regulatory arbitrage. Inadequate liability computation in the pension sector, in case of several defined benefit pension schemes, could be a potential source of fiscal stress in the years to come, it said.

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