Macroeconomic factors key for financial stability: RBI

ED Deepak Mohanty says weaknesses in corporate financials are impacting banks' balance sheets and this could impinge on financial stability

Macroeconomic stability is important for preserving stability in the financial system, according to the Reserve Bank of India (RBI).

“However refined the financial regulation might be, it cannot compensate for weaknesses in the real economy. Hence, macroeconomic stability characterised by fiscal prudence and sustainable growth with low inflation is important to preserve the overall stability of the financial system,” said RBI’s Executive Director Deepak Mohanty on Saturday.

According to Mohanty, the global financial crisis has given a greater macro-prudential orientation to financial regulation and emphasised on better quality capital so as to safeguard financial stability.

Banks are currently under stress when it comes to their asset quality.

“The current weaknesses in corporate balance sheets, partly due to subdued economic environment, have been feeding into banks’ balance sheets. This trend, if left unchecked, could ultimately impinge on financial stability,” added Mohanty. RBI had recently outlined a corrective action plan for tackling delinquent loans, including incentivising their early identification, timely revamp and prompt steps for their recovery or sale.

Mohanty believes there is a need to further beef up the levels of transparency and disclosures standards.

“Several countries have begun publishing financial stability reports (FSRs) to provide an objective assessment of the risks and vulnerabilities confronting their financial systems. However, publishing a FSR is not by itself sufficient to ensure financial stability,” he says.

“RBI is looking into the data gaps in the financial sector that need to be addressed to improve assessment.”



There is also a need for not losing sight of the pricing mechanism, as determined by market forces.

“In India, we have, over time, moved away from an administered structure of interest rates, both on the lending and the deposit sides. These deregulations have given flexibility to banks to price their deposits and loans and have improved access to formal finance. Notwithstanding these advancements, distortions in pricing still persist which need to be addressed,” he says.