Shaktikanta Das Says Domestic Lenders Healthy Despite Global Banking Volatility

There have been some improvements in high-frequency indicators around the world, according to Reserve Bank of India Governor Shaktikanta Das. However, the global economic outlook is now marred by concerns about financial stability, he said.

These uncertainties, combined with high inflation prints, have led to financial market volatility, reflected in sizeable two-way movements in bond yields, a fall in equity markets, and the U.S. dollar losing steam.

"Amidst this volatility, the banking and non-banking financial service sectors in India remain healthy, and financial markets have evolved in an orderly manner," the RBI Governor said in his speech on Thursday after announcing the first monetary policy decision of fiscal 2024.

The questions around financial stability in global economies call for a reappraisal of the responsibilities of the regulators and the regulated entities the world over and their collective role in safeguarding the stability of the financial system, Das said.

"We do an exercise called interconnectedness... how interconnected is the system and how contagion can spread. We do what is called this solvency-contagion analysis, which we recently revisited," RBI Deputy Governor Michael Patra said during the post monetary policy committee meeting press conference on Thursday. "We found that if we take the NBFCs with the maximum potential to cause losses and there is an idiosyncratic failure of those NBFCs, there will be losses to the banking system but no bank will go below the minimum capital requirement," Patra said.

"While regulators need to identify potential vulnerabilities and take proactive regulatory and supervisory measures, it is incumbent upon the regulated institutions to exercise due diligence in their risk management and corporate governance practices," he said.

The governor said financial institutions need to pay close attention to asset-liability mismatches and the profile of their deposit base while building up adequate capital buffers and conducting periodic stress tests. In this context, the RBI has focused on macro- and micro-prudential measures in recent years to prevent the build-up of financial vulnerabilities.

"We have adopted a prudent approach towards regulation and supervision and have taken several steps in these areas in recent years," Das said.

The focus at the RBI is now more on identifying the root cause of vulnerabilities rather than dealing with the symptoms alone. As a result, the Indian banking system remains sound and healthy, with strong capital and liquidity positions, improving asset quality, better provisioning coverage, and improved profitability, the RBI Governor said.