Raghuram Rajan rbi governor
Raghuram Rajan addresses a news conference at the bank's headquarters in Mumbai (representational image).Reuters file

The Modi government, which is faced with economic challenges of inflation and slow growth ahead of its maiden Budget session, seems to be getting the backing of financial bodies, with even the Reserve Bank of India expressing confidence of economic recovery.

In its Financial Stability Report on Thursday, the RBI said that the prospects of economic recovery in the country seem bright in the light of a stable government that was formed last month.

While the report did highlight issues of global and domestic economic growth and the need to address supply side constraints, the central bank seemed to be optimistic, as reported by Reuters.

"Going forward, with the formation of a stable government, the prospects of recovery appear bright," the central bank stated in its report.

"However, supply side constraints need to be addressed to complement the RBI's efforts to contain inflation expectations."

The RBI report comes in just days after financial firms such as Deutsche Bank and Morgan Stanley brought out reports expressing confidence that the Modi government would take bold decision and bring about policy reforms.

In its bi-annual financial stability report, the RBI has identified challenges for the public sector banks, whose asset qualities, it says continues to remain under the 'high risk' category.

"India's financial system remains stable, although public sector banks face challenges in coming quarters in terms of their capital needs, asset quality, profitability and more importantly, their governance and management processes," RBI governor Raghuram Rajan said in the foreword to the report.

India's growth rate has remained at an unimpressive 5 percent for the last two years, while the wholesale price based inflation touched 6.01 percent in May as compared to last year.

The RBI, however, pointed out that moderation in consumer price inflation and the reduction in fiscal deficit and in current account deficit have been a few positives.

Citing some of its expectations from the government, the RBI governor said, "Markets expect more decisiveness in government policy formulation, as well as greater efficiency in implementation."

He said that predictable tax regime, low and stable inflation will be fey factors to bring in financial stability.

"The adverse growth-inflation setting obtained over the last two years which continue to affect saving investment dynamics, poses a major challenge. A strong push to implementing policy is expected to provide the necessary impetus to the investment cycle," the Central Bank further said in the report.