The Indian economy and financial system continue to exhibit robust health and resilience, as highlighted by the Reserve Bank of India (RBI) in its 29th issue of the Financial Stability Report (FSR) released on June 27. The report underscores macroeconomic and financial stability as key anchors supporting sustained economic activity.
Banking Sector Performance
The report reveals that scheduled commercial banks (SCBs) in India are experiencing improved financial health, characterised by rising profitability and a significant reduction in non-performing assets (NPAs). As of March 2024, the gross non-performing assets (GNPA) ratio and the net non-performing assets (NNPA) ratio for SCBs fell to multi-year lows of 2.8 per cent and 0.6 per cent, respectively.
This decline in NPAs has enabled SCBs to maintain robust capital buffers. The capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio stood at 16.8 per cent and 13.9 per cent, respectively, well above the regulatory minimums.
Non-Banking Financial Companies
Non-banking financial companies (NBFCs) have also shown strong performance indicators, with a CRAR of 26.6 per cent, a GNPA ratio of 4 per cent, and a return on assets (RoA) of 3.3 per cent as of the end of March 2024. These figures highlight the resilience and stability of NBFCs in the face of economic challenges.
Global Economic Context
Despite the global economy facing heightened risks from prolonged geopolitical tensions, elevated public debt, and slow progress in disinflation, the global financial system has remained resilient. Financial conditions globally have remained stable, providing a supportive backdrop for India’s economic performance.
Current Account Surplus
For the first time in 10 quarters, India recorded a current account surplus of 5.7 billion dollars, or 0.6 per cent of GDP, in the fourth quarter of the fiscal year 2023-24. This marked a significant turnaround from previous quarters, where the current account balance had been in deficit.
The surplus was primarily driven by a lower merchandise trade deficit, which narrowed to a 10-quarter low of 50.9 billion dollars in Q4 FY2024 from 69.9 billion dollars in Q3 FY2024. Additionally, services exports grew by 4.1 per cent year-on-year in the fourth quarter, bolstered by rising exports of software, travel, and business services. Net services receipts were 42.7 billion dollars, up from 39.1 billion dollars, helping to swing the current account into surplus.
Remittances from Indians working overseas also contributed significantly, growing by 11.9 per cent to 32 billion dollars in the March quarter. However, there was a notable decline in net foreign direct investment (FDI), which fell to 9.8 billion dollars in FY24, down from 28 billion dollars in FY23.
Implications and Outlook
While the current account surplus is a positive development, it also reflects subdued domestic demand, as evidenced by the reduced demand for imports. This indicates potential economic weaknesses that need to be addressed through supportive policy measures.
The improvement in the current account balance is primarily attributed to structural changes in India’s trade dynamics and increased remittances. However, the sustainability of this surplus remains a critical point of focus for policymakers.
The RBI’s Financial Stability Report highlights the resilience and robustness of India’s economy and financial system amid global uncertainties. The banking and non-banking financial sectors have shown remarkable improvement, with significant reductions in non-performing assets and strong capital buffers.
The current account surplus, driven by a lower trade deficit and higher remittances, marks a significant positive shift. However, the decline in net FDI and the subdued domestic demand underscore the need for continuous monitoring and adaptive policy measures to sustain economic stability and growth.
