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8 major financial risks in India

India’s financial sector is poised to change with the introduction of several new programs initiated to support the needs of markets and encourage a healthy economic growth. While efforts are on to reduce vulnerabilities, the regulators have to closely monitor domestic developments and be prepared

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Following are the financial risks according to the Reserve Bank of India’s 11th issue of the Financial Stability Report:

1. Growth: Economic growth in India is estimated to have improved to 7.3% during 2014–15 as per the recent revisions in the National Account Statistics 2011–12. However, higher growth seems at odds with low credit growth, relatively lower flow of resources to the commercial sector, low capacity utilisation, subdued growth in the index of industrial production and muted corporate performance are not withstanding this improvement.

2. Inflation: Consumer price index based inflation is expected to be pulled down by base effects till August and thereafter to increase to about 6% by January 2016. And if capital flow moderates, the trend in global crude oil prices amidst considerable volatility and exchange rate movement could increase upside risks to inflation.

3. Saving and investment: Declining trends in domestic savings and investment in recent years have been a cause of concern for the Indian economy. The gross domestic saving rate declined for the second consecutive year to around 30% of gross national disposable income in 2013–14 largely reflecting the reduction in the household saving rate.

4. Government finances: Over the last few years, government finances have been under greater strain. The fiscal consolidation process has generally been expenditure-led as deficit targets have been met primarily through cuts in expenditure. Indian government’s total expenditure fell from 14.8% of GDP in 2011-12 to 13% of GDP in 2014-15.

5. Housing sector: In terms of key asset prices, the housing sector has significant implications for growth and the stability of the financial sector. Based on parameters such as the loan to income ratio and the loan to value ratio, stress in the Indian housing market appears to be low.

6. External sector: Moderation in gold imports and fall in crude oil prices have helped keep the trade deficit contained. However, given muted expected global growth and lower trend in capital inflows, risks are from uncertainties in crude oil prices as well as from lower exports. Also, possible adverse exchange rate movement may negatively affect corporate.

7. Corporate sector: Concerns remain around corporate sector leverage, especially in the context of its ability to service debt. The impact on banks’ balance sheets, high leverage of corporate may hinder the transmission of monetary policy impulses as corporate may not be in a position to benefit from falling interest rates due to high levels of debt.

8. Securities market: Concerns over foreign portfolio investors usually emerge from their potential short term destabilizing effects given their ability to move large amounts of capital over jurisdictions in short periods of time. During this year, up to June 12, 2015, the performance of Indian stock markets was relatively muted in comparison to other countries.

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