Mumbai: Amid global shocks and challenges, the Indian economy presents a picture of resilience and the regulators are ready to take appropriate actions to preserve financial stability, RBI Governor Shaktikanta Das said on Thursday.
In his foreword to the 26th Financial Stability Report (FSR), Das said the international economic order stands challenged and financial markets are in turmoil due to monetary tightening in most parts of the world.
Food and energy supplies and prices are under strain, debt distress is staring at many emerging market and developing economies, and every economy is grappling with multiple challenges, he said.
"Amidst such global shocks and challenges, the Indian economy presents a picture of resilience. Financial stability has been maintained. Domestic financial markets have remained stable and fully functional. The banking system is sound and well-capitalised," Das said.
In spite of formidable global headwinds, he said that India's external accounts remain well-cushioned and viable.
Going forward, Das said that core issues of management of climate change, dealing with unanticipated and fresh shocks, if any, further strengthening the buffers of financial system, harnessing fintech innovations and deepening financial inclusion will continue to receive priority attention from regulators and policy makers.
In 2023, India is well positioned to play a leading role in the world stage as part of its G20 presidency. The biggest challenge for G20 as a group is to re-ignite the efficacy of multilateralism, the Governor said.
Further, Das said the central bank recognises the destabilising potential of global risks even as it draw strength from the robust macroeconomic fundamentals of the Indian economy.
"The Reserve Bank and the other financial regulators remain vigilant and in readiness to ensure the stability and soundness of our financial system through appropriate interventions, whenever necessary, in the best interest of the Indian economy," he said.
Moreover, the RBI report said India's retail inflation has moderated after remaining above the upper tolerance level since January, and frontloaded monetary policy actions are expected to bring it further under control.
The RBI's Financial Stability Report (FSR) also said the persistence and broadening of core inflation may continue to exert pressure going forward.
"Frontloaded monetary policy actions are expected to bring inflation into the tolerance band and closer to the target while anchoring inflation expectations," the FSR noted.
The Indian economy is confronting strong global headwinds but the sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability, it added.
"Inflation, though elevated, is retreating in response to frontloaded monetary policy actions and supply side intervention," the report noted.
The RBI said the increase in the value of the US dollar also tends to raise inflation by driving up import prices, mainly of commodities which are invoiced in the greenback.
Currency depreciations have kept commodity prices in local currency at still elevated levels and much above their averages over the last five years in many economies, said the report.
For poorer economies, this is a "double blow" as commodity-driven inflation is likely to precipitate a "humanitarian crisis".
On the domestic financial situation, RBI said the conditions have tightened in response to the focus of the monetary policy stance on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
The RBI has been mandated by the government to keep inflation in a band of 2-6 per cent. RBI takes into account the retail inflation to review its monetary policy every two months.
After remaining above the upper tolerance level since January this year, retail inflation slipped to 5.88 per cent in November 2022 on softening food prices.