Robust FDI benefits India
With increased trade and financial linkages with rest of the world, India has become more susceptible to the vagaries of heightened global economic uncertainties, the Reserve Bank of India Governor Shaktikanta Das has cautioned.
While trade channels take some time to show a tangible impact of global shocks, it is the financial and confidence channels that quickly transmit the global shocks as was evident in the case of India during the taper tantrum period in mid-2013, said Das.
In fact, with negative and low interest rates in major economies, net private capital flows to Emerging Market Economies (EMEs) in the form of direct and portfolio investments have nearly doubled in the post-crisis period, he noted at the at FIBAC 2019 – the Annual Global Banking Conference in Mumbai on 19 August.
However, with high monetary policy uncertainties in advanced economies, these flows have proved to be fluid and therefore posed considerable risk to EMEs.
“Just a year back, EMEs like India faced financial market turbulence due to a faster-than-expected tightening in monetary policies in advanced economies. Many EMEs including India witnessed portfolio capital outflows, exerting downward pressure on domestic currencies,” he pointed out.
In recent years, India’s external sector has benefited from a sustainable level of current account deficit, largely financed by robust foreign direct investment inflows and flexible exchange rate policy, he said.
Improvement in other vulnerability indicators during 2018-19 such as fall in external debt to GDP ratio (from 20.1% at end-March 2018 to 19.7% at end-March 2019) and debt service ratio (from 7.5% at end-March 2018 to 6.4% at end-March 2019) also augur well for mitigating the spill over of external headwinds on the domestic financial markets.
Notwithstanding, strong macroeconomic parameters, constantly changing dynamics of external headwinds warrant policy preparedness in order to minimise spill overs of global shocks and preserve financial stability, said Das.
As a supplementary safeguard, the RBI has signed a bilateral currency swap agreement with the Bank of Japan for US$75 billion with the objective of bringing greater stability in foreign exchange and capital markets in the country.
Das also highlighted the increasing competition faced by banks from non-traditional players, such as FinTech and BigTechs, which are taking advantage of digital innovation.
These developments have implications for financial stability in EMEs like India.
“It is indeed imperative that banks capitalise on these technological advances and the associated business models. Regulators on their part also need to provide enabling frameworks for these endeavours by banks as well as the non-traditional players.”
Overall, India has made much progress in maintaining a stable financial system.
“However, as we have seen, the financial landscape is continuously changing, and new challenges are emerging,” he said.
The Reserve Bank is continuously harnessing the regulatory and supervisory framework to better adapt to the evolving scenario.
“The IBA, its members and other stakeholders should, therefore, be active partners in ensuring that such a process evolves successfully,” he stressed.
The conference was organized by the organised by IBA and FICCI. fiinews.com