Indian economy review: While economies around the world are grappling with a looming recession in the new year, the India story remains heartening. The latest data released by the RBI shows sound macroeconomic fundamentals with healthy financial and non-financial sector balance sheets. The country can be cautiously optimistic, the Reserve Bank of India said in its financial stability report. But that doesn’t mean that all is well with the Indian economy.
There are many reasons to be cheerful such as the gross NPAs of Indian banks falling to a seven-year low this year. There are also reasons to remain cautious. According to the RBI, the current condition is a mixed bag for the economy. Here are the highlights of the report:
Recession risks causing volatile market
Several indicators associated with the global recession are already here (Read our story here) which are causing heightened volatility in financial markets. Recessionary risks are looming large as the global economy is facing formidable problems. The interplay of multiple shocks and tight financial conditions mean unstable financial markets.
Widening current account deficit
With lesser exports, the country reported widening trade gap which has snowballed into widening current account deficit which stood at $36.4 billion or 4.4% of the GDP in the second quarter of the current fiscal. This is up from $18.2 billion (2.2% of GDP) in the first quarter and $9.7 billion (1.3% of GDP) in the year ago period.
The widening of current account deficit means that the outgo of currency is large due to imports, but the inflow is small due to lack of exports. The depletion of foreign exchange reserves was to the tune of $30.4 billion in July-September quarter of 2022-23 compared with an accretion of $31.2 billion in the year-ago period.
Inflation exerts pressure on Indian economy
While the retail inflation has moderated after remaining above the upper tolerance level since January. The Financial Stability Report says the persistence and broadening of core inflation may continue to exert pressure going forward. The apex bank has been scrambling to control inflation and has been on a spree to hike monetary policy to bring inflation under control. However, the same has proved to be a double-edged sword as hiking monetary policy rates means curbing of consumer demand which translates into slower growth at a time when the GDP of various economies are facing pressure.
Gross NPAs of banks at a seven-year low
The gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven-year low of 5% in September 2022. The net non-performing assets (NNPA) dropped to a 10-year low of 1.3% in September 2022. This means that banks are better equipped to withstand severe stress conditions. Further, India’s external accounts remain well-cushioned and viable despite geopolitical headwinds.
Speaking of the cryptocurrencies, the RBI said that in order to address potential financial stability risks and protect investors, it is important to arrive at a common approach to crypto assets. One way to go about it is to subject cryptocurrencies to the same regulation applicable to traditional financial intermediaries and exchanges. Currently, cryptocurrencies are facing headwinds and analysts are unsure of the future of digital currencies. The collapse and bankruptcy of the second largest crypto exchange FTX and subsequent sell-off in the crypto assets market have highlighted the inherent vulnerabilities in the digital currency ecosystem.