With formation of stable government, the prospects of recovery appear bright: RBI Financial Stability Report

Report says supply side constraints need to be addressed to contain inflation expectations

The key highlights of RBI's June 2014 Financial Stability Report are as follows:

* Global financial markets showing signs of improved stability, but growth is still not on strong ground and easy monetary policy continues in many jurisdictions

* Domestically, return to political stability has provided impetus to the outlook, the prospects of recovery appear bright.

* Supply side constraints need to be addressed to contain inflation expectations.

* Capital markets reflect the expectations on policy measures

* India's financial system remains stable, though the banking sector is facing some major challenges, mainly relating to public sector banks (PSBs)

* Asset quality of banks improved since September 2013

* The ownership pattern and recapitalization of PSBs are contingent upon government policy and the fiscal situation, there is a case for reviewing the governance structures of PSBs, with a greater emphasis on market discipline

* Macro stress tests show that the system level capital to risk-weighted assets ratio (CRAR) of SCBs remains well above the regulatory minimum even under adverse macroeconomic conditions

* The regulation of securities markets in India is in sync with international developments

* The lending activity of insurance companies may need to be streamlined and monitored under a prudential framework comparable to that for banks to eliminate the possibility of regulatory arbitrage

* Revised norms for corporate governance as also warehouse and related processes are expected to strengthen the functioning of the commodity derivatives market

* In the context of India's pension sector, inadequate liability computation in case of several defined benefit pension schemes can be a potential source of fiscal stress in years to come

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