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Financial Stability Report released by RBI
Dec 31, 2013

RBI has released the Financial Stability Report. The FSR, published every six months, aims to create awareness about the vulnerabilities in the financial system, to inform about the resilience to stress of the financial institutions and to generally serve as a health check on the financial system.

The highlights of the report are:

Realignment of global growth as well as high inflation differential between advanced economies (AEs) and Emerging Markets and Developing Economies (EMDEs) is a potential source of exchange rate volatility and may result in volatile cross-border flows with every repricing of risk.

India's current account deficit had shot up to an all-time high of 4.8 per cent of GDP last year on account of a heavy trade deficit and higher gold imports.

Amidst high CAD and fears of the Fed tapering the rupee touched a lifetime low of 68.85 against the dollar on 28 August this year. The rupee improved since then, but is still 14 per cent lower year-on-year.

Concerted action by the RBI and the government through curbing gold imports, opening currency swap windows and increase in money market rates to reduce speculation helped boost dollar flows.

All of these resulted in the CAD coming down to 1.2 per cent of GDP in Q2 and the exchange reserves rallying for six weeks till mid-December to over $295 billion as of last week.

However RBI predicted that India's current account deficit for the current fiscal will be below 3 per cent of its GDP.

Further Corporate performance continues to be weighed down by boom period expansions and excess capacities, amid shifting asset composition towards financial investments, the report noted.

House prices and outstanding loans for housing by housing finance companies have grown relatively faster during the last few years.

Inadequate social security coverage in India against a backdrop of changing demographics will pose challenges for expanding the pension system given the fiscal constraints, the report said, adding that the National Pension System (NPS) was created to serve government employees and private sector workers.


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