Macroeconomic risks to economy rising: RBI

The Reserve Bank on Thursday said the macroeconomic risks to the Indian economy have increased over the last six months due to the fall in growth, external sector developments and subdued performance of the corporate sector.

"The macroeconomic risks to the economy have increased over the past six months, mainly on the dimensions of domestic growth, external sector and corporate sector performance," the apex bank said in its biannual Financial Stability Report (FSR) released this evening.

The report said financing the high current account deficit (CAD), which hit an all-time high of 4.8 per cent of GDP in FY13 - a key concern on the external front - is a "stress point" for the economy as evident from the recent rupee depreciation on global cues.

India's growth dipped to a near-decadal low of 5 per cent in FY13 due to project delays and lack of decision-making at the government level apart from external factors like a slowdown in the global economy.

Going ahead the improvement in the quality of fiscal consolidation will be crucial for ensuring sustainable high growth and macroeconomic stability, the FSR report said.

On the corporate sector, the report said its performance has been "subdued" and flagged concern over corporates' increasing external borrowing and unhedged exposures, saying this can further "increase their vulnerabilities".

The FSR, however, also noted some positive factors like risks from global growth, domestic inflation and fiscal stance having receded.

The report said there are indications of growth slowdown having hit a trough, while inflation is also moderating. The measures to curb gold demand - which can help narrow the CAD - are also bearing fruit.

The apex bank said slowdown in growth was a result of domestic supply bottlenecks, policy uncertainty, dampened investment sentiment and slackening external demand. Among all these negative factors, the fall in inflation gave "some relief".

The report noted that risks to the banks, in terms of both the asset quality and profitability, have increased, but sounded confident about the stability of the sector.

It warned that if the current macroeconomic conditions persist for long, credit quality of the banks could deteriorate further.

Banks showed an improvement both in the gross non-performing assets ratio, which moved up to 3.4 per cent in March 2013 from 3.6 per cent in September 2012, and also in restructuring, which moved up to 5.7 per cent from 5.9 per cent in September.

Stress tests for various scenarios conducted on the banks showed resilience of the lenders, the report said and underlined the positive side of high capital buffers in the system.

The report expressed concern over the continued slowdown in bank credit to the export sector. "The contraction in export credit during the recent quarters is attracting the attention of the policymakers."