RBI sees no taper-related trouble;warns of rising tide of NPAs

The Reserve Bank today ruled out any major impact on domestic markets by the US Fed's tapering its monthly bond buying programme from later this week, saying that India's external sector has improved with reduction in CAD and a pick up in exports.
RBI Governor Raghuram Rajan warned however against the rising tide of bad loans saying risks to the banking system have increased over the past six months. But, he added that there are no systemic risks at the moment.
The economy is taper-ready, he said in the half- yearly financial stability report released today. "The effect of the tapering on the economy is expected to be limited and short- lived," as the external sector risks to the economy have considerably come down over the past few months," he added.

Pegging the Current Account Deficit at below 3 per cent of GDP, the report said "the country's external position appears to be manageable and reserves seem adequate," which stood at over USD 295 billion in the third week of December.
However, it added: "The banking stability indicator shows that risks to the banking sector have increased since June 2013."
The tapering, from January, of the USD 85-billion monthly bond buying programme by US Fed to prop the American economy, has given India time to replenish forex reserves and rein in high CAD, which was at 3.05 per cent in first half of this fiscal (2013-14) as against 4.8 per cent last fiscal.

The US Fed announced this month that it would cut back on bond buying by USD 10 billion to USD 75 billion a month following improvement in the world's biggest economy.

Warning on the high inflation as a hurdle for easy money policy, Rajan in his foreword said: "The outlook for the economy has improved, with export growth regaining momentum, but growth is still weak. The challenges of containing inflationary pressures limit what the monetary policy can do."
Inflation based on wholesale price index, hit 14-month high of 7.52 per cent in November. Retail inflation, based on consumer price index, rose to 9-month high of 11.24 per cent.

"Some moderation is expected in food inflation going forward, (but) persistence of retail inflation remains a concern," the report said, adding that "persistently high inflation" and the consequent pressure on interest rates poses a downside risk to growth.