Context: RBI’s Financial Stability Report outlines inflation, a reversal of capital inflows and lenders’ rising bad assets as potential hazards.
Macroeconomic risks in the Indian economy
Growing inflationary tendencies: As the nascent revival of economic growth post-pandemic collided with impaired capacities.
Risk of an imported commodity inflation spillover from the global market exists.
External risk factors: US Federal Reserve recently indicated that it might start raising interest rates sometime in 2023; this could trigger retrenchment of global capital flows.
Continuing pandemic uncertainties: As the Indian economy picks up slowly and unevenly, in step with the fluctuating pace of covid vaccination and asymmetric opening up across regions.
Deepening fault lines of our domestic banking sector: Balance-sheet damage in banking sector lurks behind extended regulatory forbearance.
The government, the sector’s main provider of capital, has limited resources that are being pulled in different directions.
Way forward:Ideas to consider in mitigating the risks
Avoid the use of forex reserves: Since there is a risk in countering any ‘taper tantrum’ if and when capital inflows reverse, and the forex reserves will be needed to neutralise the effect.
RBI should be flexible with policy rates: To adequately address the risks of inflation.
The low-interest rates have helped secure neither capital expansion nor economic growth but aided indebted wholesale borrowers.
Review public bank privatisation strategy: Full scale privatisation is unfeasible at this juncture. However, the sale of small parcels of fresh equity to retail and institutional investors can be looked into.