Reserve Bank of India governor Raghuram Rajan has warned any political instability will lead to an erosion of investor confidence in the Indian economy.
"In India, a potential additional source of uncertainty is the coming general election," Raghuram Rajan said in his foreword to the eighth edition of the RBI's Financial Stability Report 2013, released today. "A stable new government would be positive for the economy. With confidence in the financial system still fragile, six years into the crisis, policy certainty is something investors look for in the current environment."
RBI publishes Financial Stability Report (FSR) every six months and aims to create awareness about the vulnerabilities in the financial system.
Dr Raghuram Rajan said the challenge of containing inflation is limiting the central bank's ability to boost economic growth, while urging the government to continue with fiscal consolidation to support the economy.
His comments come after the RBI surprised investors by keeping interest rates unchanged this month after raising them by a total of 50 basis points in September and in October.
Analysts say the RBI could resume tightening monetary policy by early next year should inflation remain high, even as the economy is growing below the decade low of 5 per cent posted in the fiscal year ending in March.
The report also reiterated the RBI's previously stated concerns about the level of bad assets in the banking sector, while noting a corporate "failure" could trigger contagion in the interlinked banking system.
"The outlook for the economy has improved, with export growth regaining momentum, but growth is still weak," Rajan wrote. "The challenges of containing inflationary pressures limit what monetary policy can do."
The RBI report also called the "fall in domestic savings and relatively high fiscal deficit" as other key concerns for the Indian economy.
The government is expected to slash spending to meet a fiscal deficit target of 4.8 percent of gross domestic product for the year ending in March. (With Agency inputs)
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