Stable govt will bolster financial sector: RBI

Reserve Bank of India (RBI) Governor Raghuram Rajan has given his stamp of approval on the new government’s ability to resolve macro-economic problems as this could strengthen the Indian financial sector which remains fragile due to a mountain of bad debt.

In his foreword to the June 2014 Financial Stability Report (FSR), Rajan said, “As hoped for in the previous FSR, the country has chosen a politically stable government.”Rajan wrote that "markets expect more decisiveness in government policy formulation, as well as greater efficiency in implementation. Further progress on fiscal consolidation, a predictable tax and policy regime, and low and stable inflation rates will be key anchors in promoting India's macroeconomic as well as financial stability".

Big corporate treasury operations that make policy decisions ineffective, the widening gap between the volume of trade in equity cash segment and derivatives, and lending by the insurance industry are to be monitored closely to make the system stronger, the central bank said in its half-yearly Financial Stability Report (FSR).

Since the central bank started stress tests and making public its tests after the 2008 credit crisis, this is the first time it has commented explicitly on a stable government helping to strengthen the system. 

It has also rarely commented on corporate treasury operations being part of financial risk.