Source: The Hindu
Insurance companies and mutual funds run the risk of contagion from the banking sector, cautioned the Reserve Bank of India.
Random failure of a bank which has large borrowings from insurance companies and mutual funds may have significant implications for the entire financial system, said the RBI?s Financial Stability Report.
Banks increased reliance on borrowed funds, especially short-term funds, due to disproportionate slowdown in deposit growth (at less than 14 per cent as at March-end 2012)?vis-?-vis?credit growth (16.3 per cent). This could translate into rollover and liquidity risks for banks.
GOLD LOAN COS
Another example of interconnectedness cited by the RBI is between gold loan companies (non-banking finance companies) and banks.
The high dependence of gold loan companies on the banking system for funds could pose risks to the latter, in case the business model of these companies falters.
The exponential growth in the balance-sheets of the NBFCs, which are lending against gold, in recent years coupled with the rapid rise in gold prices along with expansion in the number of their branches is a cause of concern
RISKS TO STABILITY
The combined effect of the dismal global macroeconomic situation and the muted domestic economic performance has caused marginal increase in the risks to the stability of the financial system.
The threats to stability are posed by the global sovereign debt problem and risk aversion, domestic fiscal position, widening current account deficit and structural aspects of food inflation.
The RBI said the downside risks to growth may persist given the headwinds from the global economy and moderation in private and government consumption and investment demand.
The persistence of overall inflation in the face of significant growth slowdown points to serious supply bottlenecks and sticky inflation expectations.
The Reserve Bank of India has sought checks on currency trading arguing it was resulting in speculation.
The demand ? which has not found favour with market regulator?Sebi?? was made during a meeting of the Financial Stability and Development Council (FSDC) recently and came at a time when the rupee is touching new lows against the dollar and putting pressure on the overall economy.
But, sources told TOI that Sebi has managed to get a reprieve for the?currency futures?market, where trading began in 2008 after a reluctant?RBI?agreed to the plan after years of debate.
Futures are aimed at helping traders hedge their currency bets. One of the major reasons for RBI?s opposition was joint regulation with Sebi. FSDC is a regulatory coordination body comprising the regulators and is headed by the finance ministers.
RBI is learnt to have raised the issue during a meeting of the sub-committee which is chaired by the central bank governor. In recent weeks, RBI has sought to clamp down on activities that could impact currency fluctuations and the proposal is also in that direction. The rupee has depreciated over 20% over the past 12 months and closed at 56.80 against the dollar, compared to Wednesday?s close of 57.16.
Sebi has taken the plea that in the absence of a regulated segment such as currency futures, traders would be forced to hedge their risks in unregulated markets such as the non-deliverable forwards market in Singapore, where volumes are of the order of $20 billion, compared to $4 billion for currency futures. The over-the-counter market regulated by the central bank where business worth around $15 billion is transacted.
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