03rd January 2025 (12 Topics)

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RBI’s Financial Stability Report

Context

India's economic landscape is facing new challenges, particularly in the form of rising household debt and growing retail loan defaults. The latest Financial Stability Report (FSR) from the Reserve Bank of India (RBI), released in December 2024, sheds light on these developments, signaling both risks and opportunities for the economy.

Key Findings from the RBI Report

Rising Household Debt: Household debt in India has risen to 43% of GDP in 2024, up from 35% in 2020. This growth is primarily driven by consumption loans (like personal loans), while loans for asset creation are shrinking.
- Economists describe this as a K-shaped recovery, where wealthier individuals borrow for assets, while lower-income segments face increasing debt for daily expenses.
Retail Loan Stress: There is growing stress in retail loans, especially unsecured loans, which are seeing higher defaults and write-offs. Microfinance loans have also seen rising delinquency rates.
- While overall bank NPAs (non-performing assets) are low at 6%, the RBI’s stress tests suggest this could rise to 3% by 2025-26.
Economic Growth and Slowdown: The economy is experiencing a cyclical slowdown, with GDP growth forecasted at 6% in 2024-25 and 9% in 2025-26. This is tied to weak income levels and uneven consumption, reflecting broader household financial stress.
Global and Domestic Risks: Global uncertainties (e.g., geopolitical tensions, trade disruptions) pose risks to India’s economy. However, the RBI remains confident about the strength of India’s financial system, with healthy banking sector fundamentals.
Equity Market and Inflation: While the Indian stock market performed well in 2024, concerns about high valuations and slowing corporate earnings signal potential risks of a market correction.
- Food inflation and a weak rupee against the US dollar are additional risks that could affect consumer prices and overall economic stability.

Reserve Bank of India’s (RBI) Financial Stability Report (FSR)

The Financial Stability Report (FSR) is a biannual publication (June and December) released by the Reserve Bank of India (RBI).
It provides a comprehensive assessment of the risks to financial stability in India, evaluating the resilience of the financial system.
The FSR is based on the collective evaluation of the Sub-Committee of the Financial Stability and Development Council (FSDC), which comprises experts and regulators from various financial institutions.
About the Financial Stability and Development Council (FSDC)
- The FSDC was established in 2010 under an Executive Order by the Ministry of Finance. It was first proposed by the Raghuram Rajan committee in 2008 as part of financial sector reforms.
- Purpose: The primary objective of the FSDC is to:
- Monitor macroeconomic and financial developments.
- Assess risks to financial stability.
- Enhance coordination among different financial regulators.
- Promote financial inclusion and overall development of the financial sector in India.
- Composition: The FSDC is chaired by the Union Finance Minister and includes heads of major financial sector regulators:
- RBI (Reserve Bank of India)
- SEBI (Securities and Exchange Board of India)
- IRDAI (Insurance Regulatory and Development Authority of India)
- PFRDA (Pension Fund Regulatory and Development Authority)
- Chief Economic Adviser (CEA), among others.

What is K-shaped recovery?

The “K-shaped” economic recovery, is characterised by a stark split in the recovery pace of the economy— some sectors are bouncing back ahead of the rest at a much faster pace, while others are continuing a downward trajectory.
K-shaped recovery occurs if different sectors recover at different rates.
Typical economic recoveries Typical economic recoveries can include Z, V, U, W and L:

V-shaped recovery: A sharp decline followed by a rapid recovery, with very little time spent at the trough, or low point, of the recession.
U-shaped recovery: A steep decline followed by a period of time in which the economy sits at the low point of the recession before finally recovering.
W-shaped recovery: Also known as a double-dip recession, this is a scenario when the economy experiences a steep decline, followed by a small and temporary recovery and then a second decline.
L-shaped recovery: A severe recession in which the economy declines and doesn't recover for years, if ever.

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GS Analyst: Daily Current Affairs

03rd January 2025 (12 Topics)

Copy

RBI’s Financial Stability Report

Key Findings from the RBI Report

Reserve Bank of India’s (RBI) Financial Stability Report (FSR)

What is K-shaped recovery?

Still Have Questions?

GS Analyst: Daily Current Affairs

RBI’s Financial Stability Report

Key Findings from the RBI Report

Reserve Bank of India’s (RBI) Financial Stability Report (FSR)

What is K-shaped recovery?

Still Have Questions?

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