In case of domestic risks, climate risk has moved up within the ‘high’ risk category and risk to consumption demand inched up, according to the Reserve Bank of India’s systemic risk survey conducted in May 2024.
Other key risks (viz., domestic inflation, current account balance, capital flows and fiscal deficit) are assessed to have declined and provided support to domestic macro-financial stability. Risk emerging from domestic growth and investment growth was perceived to have remained unaltered, according to the RBI’s Financial Stability Report.
“In the most recent systemic risk survey, all major risk groups to domestic financial stability were categorised as ‘medium’. Respondents expressed optimism about the soundness of the domestic financial system,” the FSR said.
Survey participants felt that risks from global spillovers have receded, with around one-third showing higher confidence in the Indian financial system. The main near-term risks identified by respondents were geopolitical risks, tightening of global financial conditions, and capital outflows.
Among drivers of financial market risks, foreign exchange rate risk and liquidity risk were gauged to have moderated while risk emanating from equity price volatility and interest rate risk picked up . Risk from equity price volatility was perceived to have moved from the ‘medium’ to the ‘high’ risk category.
Institutional risks
Among drivers of institutional risks, cyber risk is assessed to have risen within the ‘high’ risk category. Risk emanating from asset quality deterioration and banks’ exposure to interest rate risk eased while operational risk increased.
About one fifth of the respondents reported higher confidence in the stability of the global financial system from the previous survey round. Around one third expressed higher confidence in the Indian financial system while another 63 per cent felt there was no change.
About 75 per cent of the panellists expected that the Indian economy will be impacted somewhat/to a limited extent by instability in the global financial system in H2:2024). Nearly 90 per cent of the respondents assessed better or similar prospects for the Indian banking sector over a one-year horizon).
Most of the respondents (67.4 per cent) expected the quality of banking sector assets to remain unchanged over the next six months, whereas over 25.6 per cent expected it to marginally improve due to higher economic growth, healthy corporate balance sheet, slower increase in slippage ratio and recent prudential measures.
About 47.6 per cent of the respondents expected higher credit demand during H2:2024 owing to factors such as higher GDP growth, pickup in manufacturing sector activity, government spending and credit demand from real estate and infrastructure. Another one fourth of panellists assessed credit demand to remain unchanged.
Nearly three fourths of the panellists expected that the Indian economy will be impacted somewhat/to a limited extent by the ‘higher for longer’ policy rate stance of systemic central banks.
About 27.3 per cent of the panellists perceived credit acceleration witnessed in the last two years as largely sustainable and another 52.3 per cent felt that it was somewhat sustainable. Some of the respondents, however, expressed concerns over consumer loan quality, cost of funds and asset quality.
