Let us wish our readers a Happy New Year- 2018 and start our discussion on RBI’s Financial Stability Report, December 2017 which covers the distinct recovery made by the world economy effected by its increasing consumption, investment and geographical spread, the other matters such as risks emerging out of volatility in commodity price, and practice of mercantilist approach in place of multilateral trade approaches developed over decades of consistent negotiation among nations. The report, further, aptly covers the current Indian economic growth particularly after the initiation of demonetization and GST measures. Obviously, the current banking scene and the impact of stressed assets on Indian banking and the expected outlook for the future do take a considerable discussing arena in the report.
An easy understanding of the voluminous report, in a simpleton’s language, is the motivation for this article.
Financial Stability Report, December 2017
The above report has been shown in RBI website on December 21, 2017 and contains 103 pages with the following chapters:
List of selected abbreviations
Chapter 1: Macro financial risks
Chapter 2: Financial institutions: Soundness and Resilience
Chapter 3: Financial sector: Regulations and Development
Systematic risk survey
Our analysis may not necessarily follow the above pattern but split its discussion to suit our understanding and find a way to appreciate its conclusion.
The continuing growth momentum of global economy has shown promises of sustainability though the Federal reserve, USA, and the Bank of England have taken steps to normalize the monetary policy. The volatile commodity prices have shaken up the emerging markets and simultaneously resulted in historical increase in exports ranking among the best in the last 6 quarters. Debt flows continued uninterruptedly in spite of hard decisions taken by Federal Reserve, USA.
More details to analyze and ponder over:
An interesting titbit, funny and a sleigh of humor:
I am exactly reproducing the following paragraph unimaginable in my youth, a couple of decades ago. Just grin and bear it.
“Starting from opacity in communicating even the policy rates to the current evolution to forward guidance, central bank communication has seen a remarkable transformation with researchers currently taking the help of artificial intelligence (AI) to decipher the minds of central bankers through their facial expressions (non-verbal communication). But is this transformation too much of a good thing?
In the context of forward guidance, Hyun Shin (2013) warns of committing a ‘category mistake.’ Shin argues that in most discussions of central banks’ forward guidance, the market is treated as a representative agent with whom central banks can sit down and reason i.e., central banks ignore the heterogeneity of the market agents. Stein (2014) draws on this insight to explain taper tantrums. He posits that even in a market with reasonable median expectations, it is the behavior of the most optimistic investors rather than that of the moderates that drives the prices as they are the ones most willing to take large positions based on their beliefs.”
Indian economy and the resultant Market
Point wise developments or important notes may widen our understanding:
Now let us discuss the Soundness and Resilience of financial institutions in India, as per the views of RBI Report, of course, simplified for easier understanding:
Resilience– stress tests (again from RBI report)
Systemic Risk Survey
The systemic risk survey (SRS), the thirteenth in the series, was conducted during October-November 2017 to capture the perceptions of experts, including market participants, on the major risks presently faced by the financial system. It is interesting to know the perceptions of the experts for two periods, namely, April 2017 and October 2017 to have a reassurance of the present state of affairs of the Indian financial system.
|Major risk groups||April 2017||October 2017|
|Financial market risks||low||low|
Further analysis of the risks, sector wise, gave further reassuring information, given as under:
However, the following information showed high risk perceptions of the experts, which on close analysis will even satisfy your curiosity.
As the detailed study of RBI report reveals Indian financial institutions are on the right track with adequate governance steps taken by RBI/Government or the external factors indication of further improvement in the economy. As the nation, important measures like identification of stressed assets, effective measures taken to take them to a final resolution, surprise provision of capital to various public sector banks by the central government and identification of 10 nationalized banks for close scrutiny by RBI, and the tightening of lackadaisical approach of some private sector banks who have failed to protect the interests of their depositors or inadequate supervision by some private sector banks during demonetization when their managerial staff collaborated with fraudulent customers in conversion of black money into white by RBI indicate that our financial institutions are in the safe hands and our future is bright.
Recent up gradation of the rank of the country in ease of doing business or sovereign up gradation of credit risk of the nation do portray s silver lining of the financial horizon.
I do encourage any serious-minded reader to read the whole report of RBI to understand the finer points of risk management as well as point of views of the brilliant monetary theorists present in RBI to safeguard the financial interest of the nation.
About the author : Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilisation, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specialising in international tax, auditing, IFRS etc., he continues his practice in New Delhi, India. He can be reached at [email protected] Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi. He is thankful to various suggestions received from readers and is delighted to see the enormous enthusiasm of readers.