23 total views, 2 views today
- What causes financial instability?
- How can RBI deal with financial instability?
- Trade-off between financial stability and growth?
Reasons for financial instability
- Increased non-official capital flows across countries through banks and international capital markets.
- Hasty and non-strategic liberalisation
- Deregulation of financial sector
- Opening up of the capital account in many countries
Intiatives by RBI
- Had set up the Committee on Financial Sector Assessment in 2009
- Will setup a dedicated interdisciplinary Financial Stability Unit with the remit to assess the health of the financial system with a focus on identify and analysing potential risks to systemic stability and carrying out stress tests on an ongoing basis
- Financial Stability Reports are being released
Financial Stability Report
- Three FSRs released till June 2011
- First was released in March 2010
- As per the three FSRs released so far, there is no serious threat to the Indian financial system
- FSR 2011
- states that the Indian financial system remains stable in the face of some fragilities being observed in the global macro-financial environment.
- Banking sector continues to be stable
- Banking stability indicator confirms the overall improvement in the stability of banking sector
- Toxity index/vulnerability index: the probability of a bank causing distress to another bank or being affected by the distress of another bank
FS in India
- The relatively crisis free environment in the Indian financial system can be attributed to the strength of state home grown policies pursued with caution and prudence.
- In the late 1990s, FS was incorporated as a specific objective of the RBI’s policy after the Asian Financial crisis.
- Present weaknesses in the financial system
- Greater access of domestic corporate to ECBs has resulted in increased currency mismatches
- Increased reliance on market borrowings could adversely affect the liquidity position of banks
- There remains gaps in the regulatory framework for NBFCs