The Reserve Bank of India (RBI), in its 25th Financial Stability Report, has said the Indian economy is on the path of recovery, though inflationary pressures, external spillovers and geopolitical risks demand “careful handling and close monitoring”. The central bank has flagged that corporate sales and profitability have risen but the durable start of capex cycle is still "elusive".

Despite positive hopes on the domestic front, the global economic outlook is shrouded by considerable uncertainty, says the RBI report. The main reasons are believed to be the Russia-Ukraine war, front-loaded monetary policy normalisation by central banks to contain high inflation and multiple COVID waves.

The evolving outlook is specifically challenging for emerging market economies (EMEs), says the RBI report. EMEs are facing rising indebtedness, currency depreciations, capital outflows and reserve losses, while they grapple with Covid-19.

Stagflation risks are mounting for EMEs and advanced economies (AEs) alike, says the RBI, while adding that tightening monetary policies are threatening the pace of growth.

On the banking sector, the RBI thinks banks, as well as non-banking financial institutions, have sufficient capital buffers to withstand shocks. But, market risks are rising as spells of volatility are unleashed by foreign portfolio investment (FPI) outflows and the sharp appreciation of the U.S. dollar, says the report.

The capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) rose to a new high of 16.7% in March 2022, while their gross non-performing asset (GNPA) ratio fell to a six-year low of 5.9% in March 2022. The provisioning coverage ratio increased to 70.9% in March 2022 from 67.6% in March 2021.

"Macro stress tests for credit risk reveal that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios," says the RBI report.

Moreover, the CRAR of urban co-operative banks also rose to 15.8% in March 2022, while that of NBFCs (non-banking financial companies) stood at 26.9%. Regulators across the globe are focusing their attention on reprioritising regulatory initiatives even as they learn from the lessons gleaned during the pandemic. "Strengthening the regulation of nonbank financial intermediation remains a priority," says the central bank.

In its assessment of systemic risks survey conducted in May 2022, the central bank says global spillovers and financial market volatility moved to the ‘high’ risk category. The survey finds that global growth uncertainty, commodity price movements, geopolitical conditions and monetary tightening in advanced economies are the major drivers of global risks. Nearly 80% of respondents say the prospects of the Indian banking sector are likely to improve or will remain unchanged in the next year.

The RBI publishes the FSR biannually. It includes contributions from all the financial sector regulators.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.