Macro economic risks have increased over the last six months over issues of domestic growth, external sector and corporate performance, the Reserve Bank said today warning that deteriorating economic stability can eventually erode financial stability.
The central bank also said the perception that India is a difficult country to do business persists and is inhibiting investment, especially foreign investment.
"We need to introspect why we rank so low on indices like the Economic Freedom Index (111/144) or Global Competitive Index (59/144) and why we keep slipping in these rankings," RBI Governor D Subbarao wrote in his foreword to the latest issue of Financial Stability Report.
The report, the seventh in the series, coinciding with the 5th anniversary of the collapse of the Lehman Brothers, said: "The macro economic risks to Indian economy have increased over the last six months, mainly on the dimensions of domestic growth, external sector and corporate sector performance.
"Domestic supply bottlenecks, policy uncertainty, consequential dampened investment sentiment and slackening external demand contributed significantly to the slowdown, though fall in inflation and significant fiscal correction have provided some relief."
The report said current account deficit and its non-disruptive financing have emerged as major challenges from the perspective of macro economic stability.
"The performance of Indian corporate sector has been subdued and in the emerging scenario, their increased external borrowing and unhedged foreign exchange exposure may further increase their vulnerabilities," it said.
In the foreword to the report, Subbarao said the slowdown and growth is the most worrisome factor, as industrial activity is stubbornly subdued and services remain below trend.
He said following the measures taken to ease supply bottlenecks, the growth outlook for 2013-14 is relatively optimistic as evidenced by the forecasts of the IMF, World Bank and Reserve Bank's own estimates.
