Mumbai– Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday warned of headwinds to the financial stability coming from the credit as well as 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,” Das said at FIBAC, a banking sector conclave organised by Indian Banks’ Association and industry body Ficci.

“The real test for PSBs is the ability to access the capital market. Increasing currency and debt crises globally adds headwinds to financial stability. Weaker than expected global growth is one of the risks to financial stability. There are global headwinds from geopolitical and trade tensions,” he said.

The comments from the RBI Governor comes amidst the economy staring at a crisis in both equity and debt markets. While the foreign portfolio investors have turned negative on Indian equity markets after the government decided to impose a surcharge on the ‘super-rich’, the debt markets have been facing issues of constant defaults and issues pertaining to refinancing, as India Inc experts say they have over-stretched themselves.

“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 over-leveraging, 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.

Apart from banks and non-banks, headwinds to financial stability can also originate from financial markets, he said, adding 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.

Globalization 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, the Governor said.

Das said with increased trade and financial linkages with rest of the world, India has become more susceptible to the vagaries of heightened global economic uncertainties.

He also noted that a consensus on the definition of the term financial stability remains elusive even today. Broadly speaking, the core principles governing financial stability can be thought of in terms of a financial system’s ability to facilitate efficient allocation of economic resources; its effectiveness in assessing, pricing, and managing financial risks; and in maintaining its capability to perform these key functions even when affected by external shocks, he added.

The Governor said the pursuit of financial stability has always been a policy priority in India. The twin concerns of monetary and financial stability constitute the core objectives of the Reserve Bank, he said. Similar to the global case, India also responded to the crisis by introducing changes in the existing institutional architecture to further the cause of financial stability.

“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. (IANS)

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