Three Economic Risks In Need Of Mitigation Plans

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.