The Reserve Bank of India (RBI) has said that non-disruptive financing of the high current account deficit (CAD) and containing its size within sustainable levels have become key challenges in managing the external sector and especially in mitigating its vulnerability to global shocks.
In addition to the magnitude of flows needed to finance the CAD, the composition of flows, particularly dependence on portfolio and short-term debt flows, represent an added source of concern. “While lower commodity prices and moderation in gold imports could have a positive effect on the current account balance, high CAD in a sluggish economy poses difficult macro-economic policy challenges,” the RBI said in its Financial Stability Report.
Rise in India’s overall external debt is an added source of concern. Short-term liabilities have also been increasing. The ratio of short-term debt to total debt (both residual and original maturity) increased in the second quarter and third quarter of 2012-13 from its level in the first quarter.
Reflecting the widening CAD, net IIP-GDP ratio increased to 15.4 per cent at end-December 2012 from 15.1 per cent at end- September 2012. In general, the external sector vulnerability indicators have shown a worsening trend.
Rising gold imports have been a continuing concern. The share of gold in total imports has been increasing since 2007-08, and was close to 3 per cent of GDP in 2012-13.
The RBI said that the rupee, which was largely range bound during January-April 2013, started weakening in May 2013. “Among other factors, strengthening U.S. dollar and relatively high trade deficit during April-May 2013 exerted pressure on the Indian rupee,” it added.
Viewed from a different perspective, against the backdrop of tepid global growth, the RBI said that other emerging economies were also experiencing similar external sector challenges in terms of size of the CAD and pressure on the exchange rate.
Asset quality of banks
The RBI said that the asset quality of banks, which was deteriorating continuously, recorded an improvement in March 2013 quarter. The gross non-performing assets (GNPA) ratio of banks improved to 3.4 per cent as at end-March 2013 from 3.6 per cent as at end-September 2012. The net NPA ratio declined to 1.4 per cent from 1.6 per cent.
“This decline in NPA was attributed to the lower slippage, improved recovery and higher write-off during the quarter. Change in classification for restructured advances with effect from April 1, 2015, may have some adverse impact on the NPAs, unless banks take preventive measures in this regard.”
At the bank-group level, the gross NPAs of public sector banks were highest and stood at 3.8 per cent as at end-March 2013, followed by foreign banks.
The quarterly slippage ratio of public sector banks declined to 0.5 per cent for the quarter ended March 2013 from 0.8 per cent recorded during September 2012. Quarterly slippage of foreign banks increased to 0.3 per cent and 0.1 per cent for the corresponding periods.
Old private banks registered highest quarterly recovery at 21.2 per cent during the quarter ended March 2013 followed by the public sector banks at 9.1 per cent. All the bank groups, except new private banks, recorded higher write-off during the quarter ended March 2013 as compared to quarter ended September 2012.