RBI Guv warns of headwinds in credit, financial markets

Shaktikanta Das, the new Reserve Bank of India (RBI) Governor, attends a news conference in Mumbai, India. (Reuters Photo)

The Reserve Bank of India (RBI) governor Shaktikanta Das has warned of the headwinds to the financial stability emancipating from the credit markets and the financial markets.

"The headwinds to financial stability could emanate from various sectors of the economy, namely, the credit market; financial markets; external sector; and payment system. It may emanate from some other sources as well. But today, I will focus on these four aspects," Das said in a speech at speaking at FIBAC, a banking sector conclave organised by Indian Banks' Association and industry body FICCI. 

The comments from the central bank chief hold significance as the country is staring at a crisis in both equity and debt markets. While the largest investor group in Indian equity markets -- foreign investors -- have turned negative on India after the Government decided to increase the surcharge on the 'super-rich'. On the other hand, debt markets have been facing issues of constant defaults and issues pertaining to refinancing, as India Inc, according to analysts has overleveraged itself.

"Soundness of the banking system may have a bearing on the financial stability through various channels - excessive credit growth; maturity mismatches and liquidity issues; a high proportion of non-performing loans; and overleveraging, among others. Even if individual institutions are robust, the overall behaviour of the financial sector can pose a systemic risk.
Hence, monitoring the health of the banking sector is crucial for financial stability," Das added.

He also said that the increasing frequency and severity of currency and debt crises globally and their ability to cause output loss calls for careful regulation and surveillance of financial markets. 

"Globalisation of finance, by amplifying the risk of contagion, and thereby constraining the policy space for effective regulation, has added to the difficulty of this task," he added.

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