High-frequency indicators in the first quarter of the current fiscal year suggest India’s economy is gradually recovering and gaining uneven strength despite global headwinds, according to the Reserve’s Financial Stability Report (FSR) Bank of India (RBI). He noted that the gross non-performing assets (GNPA) of listed commercial banks hit a six-year low as demand for loans rose after a gap.

“In the Indian economy, high-frequency indicators point to a gradual but unevenly strengthened recovery in the first quarter of 2022-23, despite geopolitical headwinds, high commodity prices, especially crude oil, and volatile financial conditions, as the global fallout works to destabilize domestic financial markets with bouts of turbulence,” the report said.

Although business sales and profitability have increased, a sustainable start to the investment cycle remains elusive, he said.

“The Indian economy is facing fallout from global conditions but remains on the path to recovery,” the RBI report said.

He noted that the sharp rise in crude oil prices has had a negative impact on domestic inflation, and the rise in oil product prices will have secondary effects on the prices of various goods and services.

RBI estimates show that a 10% rise in the price of crude oil above $100 a barrel could raise domestic inflation by 30 basis points (bps) and lower GDP growth by 20 bps.

The RBI had assumed crude oil to be $105 a barrel while estimating GDP growth and inflation projections for the current fiscal year. Brent crude has been trading above $100 a barrel (regularly above the $110 levels) for the past several months.

Bank credit growth is accelerating steadily and is already in double digits, the report said, while noting that the gross NPA was now at its lowest level in six years, with an improving loan loss ratio.

“The SCB (Regular Commercial Banks) GNPA ratio fell to a six-year low of 5.9% and the Net Non-Performing Assets (NNPA) ratio fell to 1.7% in March 2022. The coverage ratio Provisioning (PCR) increased to 70.9% in March 2022 from 67.6% in March 2021,” the report said.

Macro-stress tests for credit risk reveal that SCBs are well capitalized and that all banks will be able to comply with minimum capital requirements even under adverse stress scenarios.

“Banks have also strengthened their capital and liquidity positions, while the quality of their assets has improved. Non-banking financial companies (NBFCs) remain well capitalized,” he said.

Banking sector indicators showed an improvement in efficiency and soundness indicators in the second half of the previous fiscal year. The improvement in the soundness indicator reflects the improvement in capital buffers, with the capital adequacy ratio having increased by 18 basis points to reach 16.7%.

Although the liquidity risk indicator deteriorated slightly in the second half of 2021-22 due to a decline in the liquidity coverage ratio (LCR), it remained well above the regulatory requirement of 100% . Credit demand is also improving and growing at a double-digit rate after a long hiatus, and is now tracking nominal GDP growth, according to the report.

What’s in FSR

• Banks’ NNPA ratio fell to 1.7% in March 2022

• Credit demand now follows nominal GDP growth

• Capital adequacy ratio increased by 18 basis points to 16.7% in H2FY22