Study OAS · 01 January 2025

RBI's Financial Stability Report

The Reserve Bank of India (RBI) published its Financial Stability Report (FSR) on December 31, 2024.
The report provides an assessment of the health of the financial system and explores the possible impact on the system in various stress scenarios.

Economic Growth Forecast

The RBI forecasts the economy will expand by 6.6% in FY25, in line with the forecast given by outgoing governor Shaktikanta Das.
GDP growth had retreated to 5.4% in the three months to September, the slowest in seven quarters.

Bad Loans: Commercial banks could witness a rise in the share of bad loans, with the capital buffers potentially declining in extreme stress scenarios.
Microfinance and Consumer Credit Stress: Lingering stress in these sectors, with more than a third of external commercial borrowings remaining unhedged.
Equity Valuations: Stretched valuations and risks from external spillovers require close monitoring.
Write-offs: Sharp rise in write-offs among private sector banks, potentially masking worsening asset quality.
Retail Loan Portfolios: Fresh accretion of NPAs in retail loan portfolios, dominated by slippages in the unsecured loan book.

Gross Non-Performing Assets (GNPA): Expected to rise to 3% by March 2026 under the baseline scenario, from a 12-year low of 2.6% in September 2024.
Capital Adequacy Ratio: Could fall to 16.5% in March 2026 in the baseline scenario, and decline further in high-risk scenarios.

The Reserve Bank of India (RBI) is India's central bank and a key institution in the country's financial system.
Established: April 1, 1935, under the Reserve Bank of India Act, 1934.
Headquarters: Mumbai, Maharashtra, India.
The current Governor of the Reserve Bank of India (RBI) is Sanjay Malhotra. He assumed office on December 11, 2024, succeeding Shaktikanta Das.

Monetary Authority: Formulates and implements monetary policy to maintain price stability and ensure adequate credit flow to productive sectors. Uses tools like repo rates, reserve requirements, and open market operations.
Regulator and Supervisor of the Financial System: Prescribes broad parameters for banking operations to maintain public confidence in the system, protect depositors' interests, and ensure healthy growth of the banking sector.
Issuer of Currency: Issues and exchanges currency notes and coins, and manages their circulation.
Manager of Foreign Exchange: Manages the country's foreign exchange reserves and facilitates external trade and payments.
Developmental Role: Promotes financial inclusion and supports initiatives for development of the financial sector.

Regulation and Supervision: By setting rules and supervising banks, RBI ensures they operate soundly, manage risks effectively, and maintain adequate capital. This prevents bank failures and protects the financial system from shocks.
Liquidity Management: RBI ensures sufficient liquidity in the market through various instruments to prevent liquidity crises and maintain smooth functioning of financial markets.
Crisis Management: RBI acts as a lender of last resort to banks in distress, providing them with liquidity support to prevent a collapse of the banking system.
Macroprudential Policies: RBI implements policies to address systemic risks in the financial system, such as excessive credit growth or asset price bubbles.

Licensing and Supervision: RBI licenses new banks, sets requirements for their operations, and continuously supervises them to ensure compliance with regulations.
Setting Prudential Norms: RBI sets norms for capital adequacy, asset quality, and liquidity management to ensure banks' financial soundness.
Inspections and Audits: RBI conducts regular inspections and audits of banks to assess their financial health and compliance with regulations.
Enforcement Actions: RBI takes corrective actions against banks that violate regulations, including penalties, restrictions on operations, or even revocation of licenses.