Central banks must remain vigilant, adaptable, continuously assess risks and build resilience, said Reserve Bank of India’s governor Shaktikanta Das on Monday.
While addressing a high-level conference, Governor Das said, “They should remain prepared to navigate complex challenges, support sustainable growth, maintain price stability and promote sound and vibrant financial systems.”
“As we navigate the high intensity tail events and black swans of the current decade, the lessons imbibed can well form the basis of our deliberations today to chart out a course for the future.”
Emerging risks to financial stability:
The Governor in his speech addressed some of the emerging risks to financial stability.
He said the divergence in global monetary policies – monetary easing in some economies, tightening in a few, and pause in several other economies – can be expected to lead to volatility in capital flows and exchange rates, which may disrupt financial stability.
Secondly, the private credit markets have expanded rapidly with limited regulation. They pose significant risks to financial stability, particularly since they have not been stress-tested in a downturn, he said.
Further, the higher interest rates, aimed at curtailing inflationary pressures, have led to increase in debt servicing costs, financial market volatility, and risks to asset quality.
Stretched asset valuations in some jurisdictions could trigger contagion across financial markets, creating further instability.
“The correction in commercial real estate (CRE) prices in some jurisdictions can put small and medium-sized banks under stress, given their large exposures to this sector,” he said.
The interconnectedness between CRE, non-bank financial institutions (NBFIs), and the broader banking system amplifies these risks, he added.
