India needs to be cautious against many potential risks: Finance Ministry

In its monthly economic assessment published on Tuesday, the finance ministry sounded a warning that India should be on the lookout for potential dangers from declining agricultural output, rising prices, and geopolitical developments.

Although the 6.5 %   growth projection for the current fiscal is in line with the estimates of the World Bank and the Asian Development Bank (ADB), there are factors which could affect the favourable combination of growth and inflation outcomes currently estimated, said the March edition of the Finance Ministry's Monthly Economic Review. "It is important... to be vigilant against potential risks such as El Nino ('the child') conditions creating drought conditions and lowering agricultural output and elevating prices, geopolitical developments and global financial stability," the review said. All these three could affect the favourable combination of growth and inflation outcomes currently anticipated, it said. The report said FY23 has been strong for India's economy despite the tailwind of the pandemic and the headwind of the geopolitical conflict intertwining to escalate global economic uncertainty.

"The strength is seen in the economy, estimated to grow at 7 %  , higher than the trend rate and the growth of the other major economies. Growing macroeconomic stability as seen in the improved current account deficit, easing inflation pressure, and a banking system strong enough to survive the increase in policy rates, has made the growth rate further sustainable," it said. On the financial sector, the report said, banking supervision is robust with the RBI's overarching coverage of institutions, regardless of asset size, in its bi-annual assessment of financial stability.

Macro stress tests are also performed from time to time on individual banks. Investment in held-to-maturity (HTM) securities is limited to 23%  of deposits, reflecting an effective insulation of asset value from adverse market developments, it said. Finally, rapid withdrawal of deposits is unlikely as 63 %   of the deposits contributed by the households are considered sticky, it said.

All these factors make Indian banks different from those US and European banks who faced problems following the unwinding of tight monetary policy. With regard to the price situation, the report said, the sequential growth of CPI-core in March 2023 is the weakest since June 2022 and can be attributed to the beginning of the passthrough of declining WPI inflation in consumer goods prices.

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