Given the weak global economic prospects and continuing uncertainties in the international financial markets, the availability and cost of foreign funding for banks and corporate is likely to be negatively impacted, said Indian Finance Minister, Pranab Mukherjee in Lok Sabha, Thursday.
Presenting the Financial Intermediation and Markets sector of the Economic Survey-2011-12, the Minister said, Indian financial markets, especially currency and equity, performed under pressure during the year. Global market turmoil resulted in rising risk aversion and moderation in capital inflows that led to currency stress during August-December 2011.
Although liquidity situation tightened, countervailing steps helped mitigate the strain. Apart from global economic developments, rising trade imbalance, pace of reform initiatives to boost capital flows and domestic growth concerns are likely to influence the movements in the Indian financial markets, he added.
Indian Banks Maintain Robustness Amid Eurozone Crisis
While pointing out that sovereign risk concerns, particularly in the Euro countries, have affected financial markets for the greater part of the year, the Survey points at Greece's sovereign debt problem spreading to India and other economies by way of higher- than-normal levels of volatility.
Emphasizing that in a financial system, which is bank dominated, the ability of this institution to withstand stress is critical to overall financial stability. The Survey says that Indian banks, however, remained robust and the financial infrastructure continues to function without any major disruption. However, the Survey cautions that with further globalization, consolidations, deregulation and diversification of the financial system, the banking business may become more complex and riskier. Issues like risk and liquidity management coupled with skill enhancement, therefore, assumes greater significance.
An important reason India emerged largely unscathed from the global crisis of 2008 is the strict external commercial borrowings (ECB) policy that places all-in-cost, end-use and maturity restrictions on foreign borrowings by the corporate. The corporates, were therefore not exposed to balance sheet recession that could have happened due to excessive foreign borrowings.
The liberalization of ECB policy, however, has to keep in view the need to maintain sustainable levels of external debt. Other challenges include: innovative steps to bring corporate bond market at the centre stage of infrastructure financing and to meet financing requirements, particularly of the unorganized sector/self-employed in the micro/small business sector.